Not infrequently I am asked by someone to help them evaluate a particular rental property deal, either a single family home, duplex/triplex, larger multi-family, or mobile home park. For me, the first place to start is always with my beloved spreadsheets. A simple but inclusive spreadsheet template can help me quickly run numbers on a property without feeling like I am overlooking the common expenses to consider. For most property considerations, the income side of the evaluation is fairly straight forward. The main revenue on the income side will obviously be rental income. Other possible revenue streams could include parking spots/garages, storage space, or laundry facilities. On the expense side though, it could be easy to overlook significant expenses in your analysis without having a list or template to make sure you do not overlook any recurring expenses.
So, here’s what is on my basic template for expenses:
• Management – Depending on the size and location of the property you are considering, you might decide that you will self-manage everything. However, I think it’s always advisable to factor in the expense of outsourced management and see if the property can support that projection in case for any number of reasons you might decide in the future you want or need to outsource that role. Again, depending on the property size/type and revenue, third party management could be 5-10% of collected rental revenue per month.
• Utilities – The utilities that the landlord is responsible for at any given property can be quite variable so don’t make assumptions in this category. Find out what the current owner is currently paying for and what is set up and billed directly by the residents. And don’t assume that all units have the same utility obligations as other residents as sometimes one or more units might be covered by the landlord either out of a negotiated arrangement or because of the logistical layout of meters on a property. In other words, don’t generalize in this category; find out specifics about what is the landlord’s responsibility.
• Contract Services – These will all likely fall under the responsibility of the landlord, but depending on your area or the size and type of the property it could be worked into the lease as the responsibility of the resident; verify with the current owner.
– Lawn/Yard Service
– Snow Removal
– Pest Control
– Pool Maintenance (if applicable)
• HOA Fees – I almost forgot to mention this one as I historically have not invested in properties that are part of a home owner’s association, but certainly this can be a significant expense that you definitely wouldn’t want to leave out if you happen to be evaluating a property such as a condo or townhouse that has an HOA monthly fee.
– Property Insurance: You can see what the current owner is paying in property insurance but this won’t always be exactly what rate you will be given. To avoid any surprises, you can ask your insurance agent to give you a quote on insurance with which you can base your calculations.
– Worker’s Comp Insurance (if employees involved): This would only be a consideration if you are having employees as part of your rental property business.
• Property Tax – One of the biggest mistakes in expenses is assuming that you will have the same property tax expense as the current owner. Every county can be different as to how often they update/re-assess the tax basis for properties and recalculate a new assessment once a property transfers ownership, but you can assume they will get around to it sooner or later so make sure you know what your likely tax assessment will be once that recalculation takes place. If you live in the same area you likely know the property tax rate; if not, check the local tax assessing authority website or office to determine their method and rate of determining property tax.
• Advertising/Marketing – If you have third party property management this is likely something they will do as part of their services. However, if you are self-managing, you will be doing your own advertising. This doesn’t have to be a large expense as there are many ways to advertise for free or low cost, but always good to keep track of the small expenses as well.
• Licenses/Fees (local or property specific) – Determine if there are any local or property specific fees or licenses that will be required to operate your rental property in whatever market you are considering. Occasionally, landlords will need some type of permit or license for that business in the given area.
• Repairs & Maintenance – How much you decide to factor in for repairs in maintenance will be partially determined by what condition the property is in at the time of purchase. If it is relatively new construction or has recently been rehabbed or had significant capital improvements, your budget for repairs and maintenance will not need to be as much as if you are buying a 1920’s building with original infrastructure and a roof that is 25 years old. A percentage of gross revenues in the range of 5% would be a reasonable minimum.
• Turn-over/Rent Ready Expenses – Determine a budget for what the average turn-over expenses would be on a unit based on the current condition of the property. This would include the possibility of things like interior touch-up or full painting, carpet cleaning, window treatment repairs/replacement. Then based on your projected vacancy factor for the property you can project out the number of times per year you will likely be spending this turn-over expense and use that to annualize out a monthly budget number to use in your property calculations.
• Professional Services
– CPA: If you are doing your own taxes, good for you. But if you are like me and like to leave this to the professionals, factor in some amount for the expense of tax consulting or tax return preparation for a separate business entity which holds your rental property.
– Legal: Hopefully you won’t need much legal service, but something to consider in your budget if you are expecting to be potentially dealing with evictions in the process of stabilizing a property.
• Entity Expenses – If you are holding rental property within an LLC, consider the costs of LLC maintenance in your home state as well as the state in which the property is located (if different). In many cases this is a nominal amount but in other cases (hello California!) this is a minimum of $800 per year.
• Administrative Expenses – This is another category that depends on whether you are self-managing or outsourcing management. If self-managing, consider the annual costs of tenant screening fees, supplies, digital document signing services, etc. under this category.
• Reserves/Cap Ex – Although technically not a line item to include in your calculation of net operating income in evaluating a property for purchase, setting aside an amount each month to establish a reserve account for large ticket items is essential for mitigating financial risk on your investment. Like many expense items above, how much this reserve account needs to be could vary depending on the condition of the property at the time of purchase as well as the availability of other funds that could potentially be put into the business should any unforeseen expenses be incurred. It won’t be often that you will have to replace the roof or major infrastructure items, but you certainly want to have the money saved up to pay for such items when (not IF) the time comes. That being said, I think a minimum of $250/unit/year would be a baseline amount on a multi-unit property although my personal preference would be to have more. Personally, I would suggest a minimum of 5% of gross income.
Did I miss anything? Anything else you have in your calculations that I didn’t include?
There are multiple property analysis spreadsheets on-line, including at Biggerpockets, if you’d like a copy of the Excel spreadsheet I use feel free to request it by email.