Buy and Hold Investment Property Expenses You Will Encounter

When you find a potential property, analyzing the numbers is the only way to ensure you are buying a good investment. You need to know what investment property expenses that will come up as you hold onto the property as a rental. Without knowing the expenses, you run the risk of turning a positive cash flow into a negative one.

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Investment Property Expenses

For the Expenses, find all fixed expenses for the property that you, as the owner must cover which is everything other than the utilities, water, sewer, garbage, yard maintenance etc.

All these things, the tenant will be responsible for unless your lease has you paying for them. (I never pay these). There are really only a few expenses you will have.

1. Mortgage

   If you are going to use leverage by acquiring a note on the property, you will need to calculate the total monthly payment. You can use my free mortgage calculator to get this number. https://www.masterpassiveincome.com/mortgage-calculator

   Remember that you may have Private Mortgage Insurance if you use an FHA loan to acquire the property which will increase the monthly payment.

2. Real Property Taxes

   The County Tax Collector will have the current rent roll for the property. Most counties have the ability for you to look the information up online. Once you have the total annual taxes, divide that number by twelve to see how much money per month you will have to save.

   You will either hold onto this money in a savings account or put the money in an impound account with the mortgage company who will pay the taxes on your behalf with your money.

   Either way, be sure to save this money from each month’s rent so you do not get hit with a tax bill you do not have the money for.

• Pro Tip: Watch out for other taxes. City, County, Local municipalities, School systems, Neighborhood recreation departments, etc.

3. Homeowners Insurance

   Contact your insurance agent to see what the cost of insurance would be for the property you are looking at. Just like with the taxes, divide the annual cost by twelve to calculate the monthly amount you are to save or put into the impound account with the taxes.

   If you are concerned about how to set up an impound account, don’t be. You actually don’t do a thing other than tell the mortgage company you would like one set up, and they will do all the work.

   It will be more common that the impound account for the insurance and taxes would be required by the mortgage company.

   This protects them because they will be sure that the taxes and insurance are being paid.

• Pro Tip – Make sure you have a landlords policy, not just a homeowners policy

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4. Homeowners Association

   Depending on the area you are investing in, there may be a homeowners association that you are required to join and pay money into.

   I personally don’t like homeowners associations and stay away from properties that have them. That is my personal preference.

   I feel that these associations just take money out of your pocket and dictate to you what you can do with YOUR property. Anyways, this is something to consider in your expenses.

5. Governmental Fees for Rental Properties

   This is another investment property expenses that depends on where you are investing in. There are some cities and counties that require a rental inspection of the property to make sure the home is in livable condition.

   The cost usually is not too high (around $50 per year) but you must account for every expense so you can be prepared for everything.I feel this is a fee just to make the government more money.

   I have found the free market to be the best way to keep business honest. If the property is not in livable condition, no one will live there.If they did, the rent would be so cheap because of the living conditions.Oh well, the government passed the law and now we have to pay.

   Make sure you have your fees paid. If you don’t the government will never leave money on the table and never wait to penalize you. You could owe 10 times as much in penalties than the fees would have cost you.

   Trust me, I know from experience… 🙁

6. Vacancy Allowance

   The Vacancy Rate is a numerical value calculated as the percentage of time, per year, the property will be vacant. When the property is vacant, you do not make any money. So if you believe the average amount of time a unit will be vacant for the area you are investing in is 1 month per year, calculate the rate as a percentage and subtract that from your income.This is a good expense to plan for because you may need it or not. If you are blessed enough to not have a vacancy in the year, then your profits rise considerably. But if you do have a vacancy in the year, you are ready for it.

For an example:
A property that rents for $1,100 and is potentially vacant 1 month out of the year is an 8% vacancy rate. 1 month vacant / 12 months in a year =.08

The total monthly income would be $1,100 – (1,100*8%) = $1,012 per month income from the rents. Basically, you are subtracting one months rent from the annual rent total and dividing it by the number of months in the year. Now plug this number into your valuation to see how the numbers turn out.

7. Leasing Fee

   A fee that you will encounter unless you are self-managing properties, is the leasing fee.

   If you have someone else find and place a tenant for you, then you will need to pay a leasing fee. Usually they charge a first months rent as the leasing fee. If you rent the property for $1,100, then your leasing fee is $1,100.

   That is a lot of money taken out of your income for the first year. Instead of making $13,200 a year, you will be making $12,100. A much lower amount than you were expecting.

   To account for it in your monthly expenses, divide the leasing fee by 12 to get your monthly expense. $1,100/12=$91.67. That is $92 a month less that you thought you would normally receive.

8. Capital Reserve

   This expense is in case anything happens to your property expectantly like a roof leak, water heater replacing, or an HVAC systems need to be repaired. You are basically saving for a rain day fund where you will be able to draw money from when you need it.It is a huge headache having to repair or replace something on your property but you add insult to injury if you do not plan for how you are going to pay for it.

   I recommend saving 10% of the income each month for these expenses until you save up one and one half of one month’s rent. For the property that rents for $1,100, save 10% each month until you have $1,650 saved up for a rainy day.

   Remember, this is your money and is yours until you need it. If you sell the property, this money is yours to do with whatever you want.

Investment Property Expenses will show up whether you like them or not. In order to account for them accurately, you need to know what they are before you buy the property.

The next would be to  lower the expenses as best you can. There is always a way to lower your expenses. The trick is to find the way to do so.

Let me know what you think. Leave a comment below about how your investment property expenses can make or break your business.

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