Do you know how much money you spend taking care of your rental property each month or year? Are you keeping up with the costs of maintenance or repairs? How much will it cost you if your tenant moves out tomorrow?
These are questions you should be asking yourself on a regular basis. If you don’t know the answer, it’s probably because you don’t have a budget for your property. With the start of a new year, this is a great time to start some new (and better) habits -- like creating a budget for every rental property you have.
Here’s what should be in it.
Half of your budget should be all about income. This includes the monthly rent payment, pet fees, and other fees your tenant may pay. In most cases, the rent should be a total of the base rent and all other fees, but you may want to break these down so you can easily see what kind of income you’re receiving.
Security deposits should not be included in your income or budget. Deposits can’t be used for general expenses or repairs. You’re legally obligated to keep it separate from your income in an escrow account and only use it for potential repairs after a tenant moves out.
There are multiple expenses to consider in your budget. Some are fixed costs that stay the same every month and others are variable costs that you can’t completely predict. Variable costs, like unexpected repairs, may not happen every month but you should plan for them every month.
Fixed costs are easier to budget for and will definitely impact the cost of rent for your property. Make a line in your budget for each of these expenses:
● Property insurance
● Property taxes
● HOA or COA fees
● Special assessments
● Amenities you provide to tenants -- lawn maintenance, pool cleaning, security system, etc.
● Fees you pay -- legal, accounting, property management
Variable costs are harder to calculate, but you still need to plan for them. You can use previous years as a guide, but it’s always best to overestimate and have a little extra.
Maintenance and Repairs: You need an emergency fund for repairs that totals at least three months worth of rent. This will help with large, unexpected problems. In general, you want to calculate one percent of the property’s value for maintenance and repairs. For a home valued at $200,000, you should budget for $2,000 in maintenance expenses each year. A $500,000 home would need $5,000.
Vacancy: Believe it or not, vacancies need to be factored in as an expense. Why? Because during that time you’re losing income -- it’s costing you money to maintain a rental property, and the fixed costs don’t go away. If you factor one or two months vacancy into your budget, you’ll be covered if it happens. And if you don’t have a vacancy in a year, well, you’ll have more money you can add into your emergency fund next year.
Looking at your expenses can help you determine how much rent to charge. Having a budget with both income and expenses can help you estimate your total income or figure out what (if anything) to cut. Without a budget, you don’t know where your money is going, and you’re unprepared for emergencies.
If you need help managing your property or figuring out the right rent to charge, work with a property manager who has the experience, skills, and tools to help you succeed as a landlord. Contact ERA American Real Estate today!