Way too many people think the cash flow from a rental property is simply the rent it brings in minus the mortgage payment every month. They buy a house based off this criteria and end up getting burned when they realize there are a ton of other expenses that come up that were not accounted for and they really end up in the red every month. These expenses can turn what looks like a great investment into a money pit that you wish you would have never bought. Besides for just the mortgage payment, here is a list of expenses that need to be accounted for:
- Capital expenditures
- HOA fees (if applicable)
- Snow Removal
- Lawn Care
- Property Management
Taxes- You should be able to find the taxes for a property listed on your local county assessors website. If the number isn’t directly listed on there, they should have the assessed value which is used to determine how much they collect in property taxes for that property. Every municipality has a factor that they multiply this assessed value by to determine the property taxes. A local real estate agent should be able to calculate the taxes for you based on that information. Some municipalities have a lot higher taxes than others, surprising investors if they buy a place without checking the taxes. It can be a huge cash flow killer. See below for the links to both Beaver and Allegheny County websites.
Insurance- Give one or two local insurance agents a call. They should be able to quickly give you a quote based on the property address.
Vacany- This is a commonly missed expense. Your properties aren’t going to be fully rented all year on a consistent basis. Tenants move out, leaving you with an empty unit until you can find someone else to live there. While this isn’t a direct expense, you are missing out on income coming in which indirectly is costing you money on paper. This will vary based on the area. More desirable areas are more likely to have a lower vacancy percentage than other areas. I like to use somewhere between 5-10% of the gross monthly rent to account for vacancy. A local property management company should be able to give you a good idea of how long units typically take to rent in certain areas.
Repairs- Homes are inevitably going to need repairs over time. This is a variable expense because you never know what is going to pop up that needs fixed. You are more than likely going to spend more on repairs on an older home compared to a new or recently rehabbed one. The condition and age of the property should be the main drivers as to what percentage of the gross monthly rent you allot for repairs. I like to use somewhere between 5-15% on average every month to account for the repair expenses.
Capital Expenditures- Capex items are the “big ticket” items that need to be replaced every so often, but not every month or year. This includes roofs, appliances, windows, driveways, plumbing systems, hot water tanks, furnaces, flooring, kitchen cabinets/countertops, and any other big money items that need to be replaced over time. Like repairs, this is a variable expense that varies with the age and condition of the property. Rather than using a percentage of the rent to account for this expense, I like to look at each component and try to allot an amount each month towards each. For example, I’ll look at the next 30 years to see what the total cost of a new roof, furnace, appliances, etc would be over that time period, and then add them all up and divide by 30 years to get the yearly cost. I would then divide that by 12 to get my estimated monthly cost. It usually ends up somewhere around 5-15% of the monthly gross rent on an average priced property, but I like to analyze it that way rather than giving a percentage to it. This will increase if you have stuff that will be needing addressed sooner rather than later. Don’t forget to account for these!
Water, Sewer, Garbage- This can be an expense if the tenant is not responsible for it. In Pennsylvania, the property owner is responsible for paying the water bill. It if isn’t paid, then a lien can be put on the property. Therefore, a lot of landlords just pay the water bill for their tenants and include it in the rent, even if there are separate meters. Single family houses are probably the exception to this as mostly all the time they are responsible for all utilities.
Gas/Electricity- Like water, sewage, and garbage, sometimes there is only one furnace/boiler in an apartment building and the landlord has to pay for it. This can be a rather large expense in that case. Make sure to increase rents to account for this if so! Same goes for electricity if there are not separate meters in which tenants can pay for themselves.
HOA Fees- If you have a condo or townhouse, usually there is a homeowner association fee due payable every month. This covers things such as outside and common area maintenance/amenities such as pools and tennis courts. Make sure you check before you buy a property that might have these fees associated with them.
Snow Removal- If you own property in a cooler climate, someone is going to need to shovel/plow the snow and salt the walkways. This is a huge liability risk if not taken care of. In a single family home, the tenant usually takes care of this. In an apartment building however, you will more than likely need to hire a snow removal company. Call them to get a price.
Lawn Care- No matter where you own a property in the country, the lawn is going to need to be taken care of. Like snow removal, on a single family home the tenants usually take care of this. For an apartment building, however, you will either need to call a company to get a price to cut the grass and maintain the yard, or recruit a local neighborhood kid who won’t mind doing it to make some extra money.
Property Management- Most landlords don’t account for property management because they plan on managing the property themselves. This is fine if you just own a few rentals and can manage them all without wanting to pull your hair out. However, if you plan on owning many units there will come a point in time where it won’t be sustainable to continue managing them yourself. Not only this, but do you really want to be managing a rental property once you retire and get older? I sure wouldn’t! I always account for property management even if I plan on managing it myself for awhile because you never know what will happen down the road. You don’t want to be stuck having to manage a property because you can’t afford to hire a management company since you didn’t account for this expense in your initial calculations. Property management companies typically charge around 8-10% of the gross monthly rent to manage your property for you.
So as you can see, there is definitely more to account for to determine your monthly cash flow rather than just the mortgage payment. All of these different expenses can really add up and surprise you if you are not aware of them. Keep these in mind when going to analyze potential investment properties. Nobody wants negative cash flow!