In our continuing series about buying an investment property, we turn our attention to the expenses. In our current market, it’s relatively easy to find properties where the rent covers the mortgage payment, but what else should investors take into account?
Obviously, condo or HOA fees are a big ticket item. Don’t forget these!
Property insurance. Even in a condo that comes with a master insurance policy built in, you’ll need landlord insurance.
Maintenance and repairs. Remember that you have a basic standard of safety and living that you need to provide your tenants. The amount you budget is largely impacted by the condition of the property you buy.
Vacancy. In a perfect world you’d have a tenant move out and another one move in the next day, but in reality it rarely works that way. Budget for at least a week or two of vacancy, which doesn’t sound like much but when you do the math, 2 weeks vacancy = 3.8% of your annual rent.
Property management. Most property management firms charge 6-10% of the rent to manage your property. Some states require you to have an in-state representative for the property, so if you’re not local, keep that in mind. The percentage sounds hefty, but do you want to be the one taking midnight phone calls about the leaking water heater, and then taking time off of work to wait for the plumber?
Advertising/Tenant Screening. If you plan to hire an agent to advertise, find a tenant, show the property, and then screen the tenant (check credit reports, references, and verify employment), you’ll need to pay for that service. Fees vary.
Depreciation. This is a non-cash expense, of course, but significantly reduces your tax bill. When estimating depreciation, remember that you can’t depreciate the value of the land–only the structure.
It’s also a good idea to budget for a ‘miscellaneous’ category…Murphy’s Law applies to investment properties, too.
Read More: How do I find an investment property?
Read More: Finding an investment property.