As a landlord, you don’t need a business degree to understand that your income should exceed your expenses. It’s the basic rule of business. If you spend more than you make, you simply won’t be able to turn a profit.
When preparing your property management financials, you will need to consider your costs. That way, you can compare your expenses to your expected income. In this post, we will be discussing the common costs involved in running a rental in South Florida. This should give you a good idea of what should be in your budget, and guide you in making changes to maintain your property’s profitability.
Repairs are inevitable in any rental property. The issue is that repair-related concerns can pop out of nowhere, so there’s a good chance you’ll be caught off-guard.
Rental repairs can cost thousands of dollars, and if you haven’t included that in your financials, you’ll likely have to pay out of pocket. As an example, roof repairs cost anywhere between $1,500 and $7,000. To be safe, it’s best to embrace the “expect the unexpected” mindset and set aside some money for unforeseen repairs. Even if you don’t end up paying for certain repairs, at least you’re prepared.
Along the same lines, you must also budget for your day-to-day maintenance obligations. It’s crucial to conduct maintenance to make sure the home remains in tip-top condition, and that minor concerns don’t turn into costly headaches. To save yourself from future repair costs, you must make time for maintenance. Besides, a well-maintained property can influence tenants to renew their lease agreements.
Compared to repairs that tend to catch you by surprise, maintenance costs can be predicted. Most property management professionals suggest allocating 1% of the property’s value for maintenance expenses. So, if your property is valued at $500,000, you’d have to set aside at least $5,000 for repairs. You could also opt for the “$1 for every square foot” rule, where a 1,000-square-foot property would need $1,000 in annual maintenance costs. However, if you plan to perform some of the maintenance yourself, or if you expect your tenants to do some maintenance work, you can set aside less.
#3 Mortgage Payments
Not all real estate investors have the money to pay for a property in full. For that reason, many of them turn to mortgages. The downside to not paying upfront is that you’ll have to set aside money for mortgage payments every year. This can ruin your cash flow.
To cover the cost of your mortgage, you’re going to need to charge a higher rental rate – that is, if you can. If other properties in your area are charging a lot less than you and you charge more, your potential tenants are bound to choose your competitors. Your property won’t be able to make money, and in turn, you won’t get to pay your mortgage. To make sure your rental income can cover your mortgage costs, you must consult a property management company.
Another expense you can expect to pay as a rental property owner is your insurance. It protects your property (and yourself) from specific scenarios such as natural disasters, floods, etc. Plus, insurance safeguards you from personal liability in case your tenant or contractor gets into an accident on your property.
Landlord insurance costs more than your typical insurance policy. According to Insurance.com, landlords have to pay an average of $1,288 per year. With that said, be sure to budget for insurance, otherwise, your policy will be canceled and your property will be unprotected.
#5 Property Management Fees
Many rental property owners refrain from hiring a property management firm as they don’t want to pay property management fees. However, what they don’t realize is that working with a property manager can save them time and money in the long term. Even if you’ll have to pay your property management company around 10 percent of the monthly rent, consider the value they can provide. They will handle the day-to-day demands of your rental property, such as collecting rent, screening renters, and more. As experts, they can also reduce the risk that comes with real estate ventures.
#6 Other Expenses
It would take an extremely long time to go over every single expense. In addition, the costs you’ll incur as a property owner will depend on your circumstances – for instance, only property owners in HOA communities would have to pay for HOA fees. Here are other expenses you can expect to pay:
- Property taxes
- Property improvements
- Tenant screening
- Homeowners’ association (HOA) fees
- Condominium owners’ association (COA) fees
- Legal fees
To find out what specific expenses you can expect to pay, consider consulting a local property management company.
How to Keep Costs Low
Earlier, we mentioned that the number one rule in business is to make more money than what you spend. But how, exactly, can you do that? Here are a couple of tips on how you can cut costs:
- Take advantage of tax deductions. One of the benefits of being a landlord is that most expenses are tax-deductible. You can, for instance, reduce your costs by deducting costs such as depreciation and repairs.
- Screen tenants. Bad tenants are bad news, as they’re more likely to commit violations, not care for your property, and more. That said, you must do your due diligence and screen your tenants strictly.
- Review your rental rate. How does your property compare to other properties, rate-wise? Check the market rates to make sure you’re not missing out on the chance to earn more rental income. Increasing the rent is one of the best ways to mitigate property management costs.
Are You Spending More Than You Make?
Wondering why you aren’t making as much as you had hoped to make? Chances are that your expenses exceed your rental income. To keep costs low, consider partnering with a property management company like Luxury Property Care. As rental management experts, we can provide sound advice on how to reduce your costs without compromising the tenant experience. When you partner with us, you’ll get to benefit from our years’ worth of experience in reducing expenses to increase profits. Dial (561) 944 – 2992 or complete our contact form today to start saving on property management costs.