Don’t Overlook These 5 Items On Your Next Rental Property Purchase
By Paul Esajian on May 4, 2018
There is more to a rental property bottom line than the rent received. Of course, you always want to maximize your rent but getting above market rents are not enough. You need to evaluate the big picture before you can make a determination on the property. There are several often-overlooked items that play a huge role in the monthly cash flow. Underestimating or blindly overlooking these items can turn a seemingly strong rental into average one. Like anything else in the world of real estate the more information you have, the better decisions you will make. Always know, and understand, all the numbers and expenses with your property prior to even making an offer. Here are the top five often overlooked items when calculating monthly rental property cash flow and expenses.
- Taxes and insurance. You don’t need to be a seasoned investor to recognize that taxes and insurance factor into the monthly expenses. However, what is often overlooked is that these numbers do not remain constant forever. A decaying roof, a new pool or a trampoline will have a dramatic impact on your annual homeowner’s insurance amount. Even if the property remains the same you can end up paying more for your homeowners from year to year. The same is the case with your annual property taxes. A majority of the time your taxes will remain within $100 of the previous year. However, if there is a change in local unemployment, school closings or new construction it is not a stretch to see taxes rise 10-20%. This is the exception rather than the norm, but it must be considered, especially in declining markets.
- Lease turnover costs. The turnover from the current lease to the new one is always filled with unexpected costs. Even if your tenant takes pristine care of the property there is still work you need to do. Start with having the property professionally cleaned at the end of every lease. Giving it a good once over is not enough for your new tenants. You should plan on spending a few hundred dollars cleaning your rental. It is also a good idea to have the main living area, hallway and kitchen painted every lease. In most cases these areas will be neutral colors that get dirty without much effort. If the entry rugs are dirty and outdated you should spend a few dollars replacing them. Finally, it is not uncommon for some towns to have an annual application fee, especially if the unit is a student housing rental. This fee will only be around $150 or so, but still must be noted in your monthly expense sheet.
- Seasonal items. There are several seasonal items that must be factored into your bottom line. Depending on where the property is located you will have a handful of weather related expenses. In areas with snow and cold you will either have to make yourself available or pay someone for snow removal. Depending on the size of the driveway and walk you may be looking at $50 or more every storm. On any given winter there could easily be a half dozen or more storms. You also need to consider the yard care expense. Getting mulch in the spring, trimming the bushes and biweekly grass cutting adds up over the course of the year. A mow can cost between $30-$50 depending the size of the yard and frequency. Moving inside, you must perform seasonal maintenance on the mechanicals. Getting the HVAC, oil tank or furnace cleaned and “tuned up” can seem like a waste of money but it lengthens the useful life of these items by years. Individually these won’t break the bank but added together they will impact your bottom line.
- Major repairs. Buy and hold rental owners think their property is immune to any long-term damage. The harsh reality is that a rental property is like any other property in that over time things wear down and need to be replaced. Your roof and furnace are only going to lost for so long before they eventually break down. When they eventually do break down you need to have reserves to replace them. This can either be from credit cards, a home equity line of credit or personal savings but you should always expect the unexpected. You can’t only hold off major repairs for so long. If the roof catches a leak you need to get on it ASAP. Every few years you should expect a costly item to be replaced.
- Utilities. It is very rare that your tenant will pay for every utility in the property. In most cases the landlord covers the water and sewer bill. This bill may only come three times a year but still must be accounted for. These bills can reach $500 or more annually, depending on water usage. You can pass these off on your tenant but by doing so you will impact the demand of the property. In areas of higher rental supply tenants shop around for the best deal. They are not going to pay unreasonable utilities on your property unless they are getting something of value in return.
As you can see, there is a lot that goes into the rental property bottom line. Don’t ever get caught with a property where you don’t know all the expenses associated.