Being a successful landlord requires the ability to plan for all the routine and unexpected rental property expenses, starting with maintenance. But for many new landlords and investors, preparing an accurate rental property budget is easier said than done. Landlords often overlook many property maintenance variables when estimating rental income and profits. Sadly, some end up losing their properties as a result. As a landlord, the following rental property budget template should help you put aside enough cash for those inevitable “rainy days.”
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Rental Property Expenses for Investors
The first rule when creating an accurate rental property management budget is understanding that no two properties are alike. Your annual expenses may be quite different than a similar investment property next door.
To answer the question “How much should I budget for?” you’ll need to compile a checklist of ordinary rental property expenses you may or may not incur each month. Since maintenance is a significant chunk that tends to change from month to month, place it at the top of your list.
In addition to maintenance, include these other categories on your list:
- Property Taxes
- Utilities
- Property Management
- Property Insurance
- Appraisal Fees
- Inspection Costs
- Broker Fees & Tenant Screening
- Marketing Costs
- Property Improvements
- Accounting Fees
- Vacancy Costs
- Business Permits
- Closing Costs
- Monthly Mortgage
- HOA Fees (if applicable)
- Trash Collection Services
- Periodic Vacancy
- Capital Expenditures (“CapEx”)
- Tenant Screening
Using property maintenance as an example, now it’s time to look at different ways to estimate your expenses.
How to Estimate Expenses for a Rental Property
As a property owner, planned and unplanned monthly expenses inevitably impact your bottom line. Before purchasing a new rental property, estimating your property maintenance costs will help determine how viable that investment might be. When preparing a property maintenance budget, be sure to plan for emergencies by saving a little money along the way.
Whether you are using an online ROI rental property calculator or Excel spreadsheet, be sure to take these steps before crunching the numbers:
Talk to local industry professionals.
Experienced industry insiders are an invaluable source of advice. Consider talking to your realtor or reaching out to a reputable property management company. Property managers and real estate professionals are typically “in the know” regarding common challenges landlords face.
In addition, many property management companies are eager to help, especially if you might be interested in their services. Cultivating a relationship with a property management firm from the outset could help you find answers to all your questions, along with suitable representation for your rental property.
Contact utility companies.
Utility costs are a significant monthly expense for both residential and commercial properties. Request billing information from local utility companies that encompasses the past year. Even if they can’t give out specifics, they should provide estimates that you can then use to calculate expenses. Since some potential tenants will also want to know this information, having it available will help them determine if they can afford your listing.
Build relationships with trusted contractors.
Successful rental property investors also rely heavily on vendor relationships. Their input not only helps you budget more efficiently, having a list of trusted contractors will allow you to get emergency repairs completed without a hitch.
If your goal is decorating a rental property on a budget, a reputable contractor can perform the renovations in a timely fashion. Having a list of qualified professionals to maintain your property’s essential systems can pay additional dividends in the form of industry insight when estimating potential replacement or upkeep costs.
Try different ways to estimate your expenses.
These different rules and formulas can help you make a more informed decision when allocating funds for annual upkeep and other non-maintenance-related expenses:
- 50% Rule – The premise of this rule is that half of what you make in rental income will go out in the form of expenses— excluding the mortgage payment. For example, if you earn $2,000 per month in rental income from a property, expect to pay $1,000 per month for expenses.
- 1% Maintenance Rule – This rule specifies that owners should expect annual maintenance costs of around one percent of the property’s purchase price. Suppose you paid $200,000 for the property. Set aside $2,000 for basic maintenance needs.
- Square Footage Formula – You can also use square footage to estimate maintenance expenses. This formula advocates budgeting a minimum of one dollar per square foot of space annually. For instance, a 2,000 square foot commercial space would cost you an estimated $2,000 in basic yearly maintenance.
- 5X Rule – This estimation method implies that you should calculate annual maintenance costs that average 1.5 times the monthly rental rate. If your property rents for $1,200, you should anticipate spending approximately $1,800 a year on repairs.
Types of Rental Property Maintenance Expenses
Budgeting for rental property expenses requires the ability to anticipate various maintenance needs. As a rental property budget planner, these are the different categories of fixed or variable maintenance expenses that you can expect to pay for:
- Regular Monthly Maintenance – As the easiest to budget, these include monthly costs associated with maintaining the exterior curb appeal and any common interior areas of the property. Landscaping, routine exterior and interior cleaning, and garbage and recycling collection are examples of monthly maintenance costs.
- Emergency Maintenance – This term refers to unexpected repairs due to the HVAC system or appliances not working, burst pipes, and other emergencies.
- Preventative Maintenance – Performing routine maintenance on essential building systems helps prevent emergency repairs. Consider maintaining contracts with HVAC, appliance, and pest control companies to perform regular inspections.
- Seasonal Maintenance – Seasonal maintenance will vary depending on the location and type of property you own. Examples of seasonal maintenance include tree pruning, snow removal in the winter, or gutter cleaning in the fall.
Are Tenants Responsible for Rental Maintenance & Repairs?
If you, as the landlord, are responsible for making repairs, you should pay for the repairs. Likewise, if the tenant caused the damage and is responsible, then the tenant will need to pay unless some other arrangement is worked out.
The lease agreement should answer any questions and clarify gray areas concerning maintenance. That’s why it’s important that you and your tenant both have access to the signed lease agreement and that your lease agreement is comprehensive enough to address issues like maintenance and repairs.
Each state and municipality has specific landlord-tenant laws related to maintenance, so be sure that your lease is both state and local ordinance compliant.
What Do Security Deposits Cover?
As stipulated in the lease agreement, you may use a security deposit to complete any repairs or replacements in a rental space if the damages directly result from the tenant’s actions. However, you cannot typically use a tenant’s security deposit to pay for property maintenance expenses. You, as the landlord, are responsible for those expenses.
For instance, if a renter breaks a window or causes permanent damage to the floors, walls, or infrastructure of the property, then you as their landlord can apply part or all the security deposit toward said repairs. Suppose the property is in good condition with no need for repairs when the tenant moves out. The security deposit should be refunded to them unless otherwise stipulated in the lease agreement.
Allow Our Professionals to Manage Your Rentals and Expenses
Successful real estate investors know that relying on an experienced property management firm can help control costs and maximize profits. GNP Realty Partners has extensive experience managing all types of commercial and residential rental properties in Chicago. Our dedicated professionals can handle all day-to-day aspects of your business operations, including preventative maintenance, inspections, tenant repair requests, and more. Allow GNP Realty Partners to take your investment to the next level by contacting us today!
