How to estimate expenses on a rental property

How to Estimate Operating Expenses on a Rental Property

To estimate operating expenses on a rental property, consider mortgage payments, property taxes, insurance, and maintenance costs, which typically include both regular upkeep and occasional major repairs. Make sure to factor in utility costs if not covered by the tenant, as well as property management fees, vacancy costs, and potential legal or accounting fees. Make sure to account for homeowners' association fees (if relevant) and capital expenditures for significant future improvements or repairs.

Here’s a general guide:

  1. Mortgage Payments: If you have a mortgage on the property, include the monthly payment amount. This is often the largest expense.
  2. Property Taxes: Research local property tax rates. These can vary widely depending on location and property value.
  3. Insurance: Factor in the cost of property insurance, which can also vary based on location, property value, and coverage extent.
  4. Maintenance and Repairs: A common rule of thumb is to set aside 1% of the property's value annually for maintenance and repairs, though this can vary based on the property's age and condition.
  5. Utilities: If you're paying for utilities (like water, gas, electricity), include these costs. Sometimes these are covered by the tenant, so this may not apply.
  6. Property Management Fees: If you're using a property management company, include their fees, typically a percentage of the rental income.
  7. Vacancy Costs: Account for the potential loss of income during periods when the property is unoccupied.
  8. Legal and Accounting Fees: Include costs for legal services (for lease agreements or disputes) and accounting (for tax preparation and financial management).
  9. HOA Fees: If the property is in a homeowners' association, include these fees.
  10. Capital Expenditures (CapEx): Budget for major repairs or improvements that are not annual but can occur every few years, like roof replacement or major appliance purchases.
  11. Miscellaneous Costs: Include any other potential costs, such as advertising for tenants, tenant screening, or landscaping services.

Each property will have unique expenses, so it's important to tailor this list to your specific situation. It's also wise to overestimate slightly to ensure you're prepared for unexpected costs.

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