As we’ve all witnessed, the real estate market has experienced an unprecedented boom in recent years. In fact, the median home price in 2021 across the United States was approximately $350,000!
Before prices continue to climb even higher, many people are looking to secure a rental property that helps them generate passive income. Many people are unsure of how to accurately estimate rental property costs, though.
Doing so is essential when it comes to getting the highest return on your investment. Let’s take a look at some of the key details you should keep in mind when calculating rental property expenses.
Property Taxes
Tax rates on rental properties can vary greatly from city to city.
In order to estimate your property taxes, you’ll need to know the assessed value of your rental home. You will need to check your local laws and regulations to determine this number. There can also be a large difference between homes located in different states.
This means that those who are looking to purchase a rental property in a different state should not assume that tax rates are similar to their home state.
Property Maintenance and Repairs
Rental homes require regular maintenance just like any other property. In order to budget for repairs, you should anticipate spending 1-2% of the rental’s value each year.
Some of the most common issues include plumbing complications and electrical problems. You may also encounter miscellaneous damages like broken windows. Put simply, you can’t assume that you will never have to pay for maintenance or repairs.
This is true even if you have stellar tenants in your home. Regardless, you should always conduct proper tenant screening to ensure that you get the best tenants possible. This will help minimize the chances of these complications occurring.
Factors to consider when screening tenants include work history, rental history, and whether or not they have a criminal record.
Home Insurance
Your rental property will always need its own home insurance policy.
The cost of this policy will depend on the size and value of your rental, as well as your deductible amount. It’s also worth noting that you will have to purchase private mortgage insurance if you own less than 20% equity in your rental property.
To help put this into context, let’s assume that you purchase a home for $500,000.
A down payment that is 20% of this total amount would be $50,000. If you only put for the down payment of $25,000, you will need to purchase private mortgage insurance. This is simply done to protect the lender from borrowers who may not be able to make their mortgage payments over time.
The good news is that you no longer need private mortgage insurance once you reach 20% equity. This can allow you to generate higher profits in the future.
Management Fees
If you’re not going to be managing the rental property yourself, you’ll need to budget for management fees. These fees will vary depending on the property managers you work with.
More often than not, they are negligible compared to the amount of work you would need to do if you handled your property on your own. Hiring a reputable rental property management company will ensure that you make the most money while minimizing your burden.
This is one of the key elements that you need to consider when looking to accurately estimate expenses for rental properties — be sure you don’t overlook it.
Vacancy Rates and Losses
All rental properties experience vacancies at some point. In order to account for this, you should assume that your rental will be vacant for at least 10% of the year.
This means that you will need to cover all costs during this period, such as your mortgage payment and utility fees.
Ongoing vacancies can quickly eat into your profits. In fact, it’s often a rental property owner’s worst nightmare to have a vacancy that lasts for months. So, it’s in your best interest to do all that you can to minimize them.
As previously mentioned, working with a property manager can help you do so. They achieve this by marketing your property and securing tenants as quickly as possible.
It’s not uncommon for top-tier property management companies to find tenants within a month of a vacancy occurring. In some cases, you might find that you never deal with a vacancy longer than 30 days throughout the entire year.
Keep the 50% Rule in Mind
So, what is the 50% rule? In essence, it’s a helpful guideline to use when estimating rental property costs.
This rule suggests that your annual mortgage and interest payments, as well as insurance and property taxes, should not exceed 50% of your rental income.
In order to estimate your rental’s monthly operating expenses, you’ll need to factor in vacancy rates, repairs, management fees, and utilities. Once you have all of these numbers, add them up and divide by 12 to get your monthly estimate.
Having a rental property with expenses that exceed 50% of your income often isn’t worth the investment. Even if minor contingencies arise, you might find yourself barely breaking even. So, it’s in your best interest to minimize expenses as much as possible.
Estimating Accurate Rental Property Costs Is Essential
By following these tips, you can ensure that you’re calculating rental property costs accurately and making the most prudent financial decisions for your investment. From here, you will be able to maximize your returns and minimize your risks.
Want to learn more about what we have to offer? Feel free to get in touch with us at Rent Safe today and see how we can help with your tenant screening needs.
