Expenses Every New Landlord Should Budget For

According to Real Estate Income Guru Paula Pant

By Meg Scarborough

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Real estate can be a great investment, but all new or prospective landlords should be aware of the costs associated with owning and managing a rental property. 

“If my rental income covers the mortgage, I'm golden."

Those new to the real estate rentals market often oversimplify the math that goes into evaluating an investment. The truth is there are lots of costs beyond the mortgage to consider—ideally before closing on a property.

Paula Pant, the mastermind behind AffordAnything.com, has made a name for herself as a real estate income guru. In 2010, she decided to invest in real estate properties, but not before doing a little homework. Six years later, she manages five small properties and has some serious financial freedom.

There have been bumps along the way financially, so in order to avoid them (and stay in the black), Pant recommends budgeting for the following:

Vacancy

When evaluating whether a rental property is a good investment, remember that many properties will have a short period of vacancy each year. No tenant means no income. Look up the vacancy rates in the neighborhood, since they can vary from place to place, but you can generally expect a 5 to 10 percent vacancy rate per year. Additionally, sometimes tenants won't pay their rent. It's an unfortunate reality, but one that should be figured into potential costs.

Repairs and Maintenance

Overall, it's important to allocate about 1 percent of the property's value each year for repairs and maintenance, which includes both routine and major events. When something goes seriously wrong—the roof leaks, the HVAC system goes out, mold starts growing in the basement—landlords should have cash reserves on hand. These costs are referred to as “capital expenditures," and it's key to budget for them. A good rule of thumb is to keep three months' rent on hand. If the rent is $1500 per month, keep $4500 for capital expenditures (this can be factored into the 1 percent). While small property owners can often take out a home equity line of credit, that should be a last resort.
 

Landlords should allocate about 1 percent of the property’s value each year for repairs and maintenance. Some common issue include:
 
  • Pest control
  • HVAC system maintenance
  • Leaky roofs
  • Moldy basements
  • Plumbing issues


Legal and Accounting Fees

Treat a rental property like a business—because that's exactly what it is. This means hiring the right professionals to help navigate uncharted areas (like the law). At a minimum, every small property owner should hire a lawyer and an accountant. Legal issues and real estate taxes are far too challenging for most people to handle on their own. Bookkeeping software is also a smart investment (Pant recommends LessAccounting) to help automate expenses and keep track of the property's overall financial health.

While earning money from a rental property can be a sound financial strategy, always make sure to calculate the potential costs before diving head first into the world of small property management.

For more detail on whether it's a good idea to invest in a particular property for rental income, check out Paula's article that goes over the three formulas to run.

Meg Scarborough
About the Author:
Meg Scarborough
Meg is a writer and editor who covers cloud security, technology trends and personal finance, among other topics. She is currently a managing partner at content strategy firm KDMedia.