Owning a rental property sounds like a dream. You purchase a home, find tenants, and collect checks every month. However, the reality is much more complex. That’s because hidden costs can quietly eat into profits even before you notice. This is why you need to have a solid understanding of rental property costs. Read this guide to help you get an understanding of those expenses.
Why Tracking of Rental Property Expenses Is Essential
Many new investors get hung up on rental income alone. They look at $1,500/mo. in rent and assume they’re making all that money in profit.
Tracking your expenses allows you to see your actual net operating income. NOI is your profit after operating expenses, but before mortgage payments are paid. It’s one of the most important figures for real estate investors to know.
Why Expense Tracking Is So Important
- You set the right rent prices. Overpricing your rental will scare tenants away, but if you don’t know your costs, you risk underpricing it. Then you’ll lose money each month.
- You identify problems quickly. When you track your expenses, you’ll notice when costs are creeping up. You can catch these issues before they snowball.
- You file accurate taxes. The IRS lets you deduct most of your expenses on rental property. If you don’t know what you spent, you might pay more taxes than you need to.
- You make smarter investment decisions. Once you know your real costs, you can determine with certainty whether you should buy, sell, or refinance.
Your rental property should be treated like a small business. Remember that no self-respecting business owner neglects their bookkeeping. Don’t be that person.
What is Included in Operating Expenses for Rental Property
Operating Expenses (OE) are costs incurred monthly to maintain your rental property. Your mortgage principal is not an operating expense. With that said, almost everything else is. Let’s review into each of these.
Property Taxes
Property taxes can be the second-largest monthly expense after your mortgage. Property taxes vary wildly by city/state. For example, property taxes in Texas tend to run higher than the national average. Either way, you are required to pay taxes whether or not your unit is rented.
Insurance
A landlord insurance policy should cover all rental properties. This is not the same as a standard homeowner’s policy. Landlord insurance covers property damage, liability, and loss of rental income. Expect to pay 15–25% more than you would for a standard homeowners insurance policy.
Property Management Fees
If you use a property manager, plan to pay anywhere from 8–12% of the monthly rent. On a $1,500/month rental, that’s $120–$180 each month. In exchange, the property manager screens tenants, takes care of maintenance calls, and drafts lease agreements. Property management fees are a key component of what is included in operating expenses for rental property.
Maintenance and Repairs
Roofs will leak. Furnaces will stop working. Appliances break down. Budget approximately 1% of your home’s value each year for maintenance. On a $200,000 home, that’s $2,000 per year. $2,000 per year translates to $167 per month.
Keep in mind that when negotiating your purchase price, older homes typically have higher repair and maintenance costs.
Utilities
Who pays for water? Trash? Electricity? Sometimes landlords pay for these costs. Others will pass all utility bills onto the tenant. Whatever the case may be, know what’s expected upfront when you set your rental price.
Vacancy Costs
Rent is not collected every month. What happens when tenants move out? How long will it take to clean, repair, and re-rent the unit? Most investors plan for 5–10% vacancy rates. If you’re renting your home for $1,500/month, that’s $75-$150 each month to cover vacancy costs.
Landscaping and Cleaning
Cutting grass, snow removal, and cleaning common areas are costly. These costs can easily be forgotten, but they will be on your ledger every month.
Rental Property Expenses Checklist for Accurate Financial Management
Here’s a checklist you can use to make sure you account for every expense before you purchase or price a rental:
Fixed Monthly Expenses
- Monthly Mortgage payment (This includes both principal and interest)
- Property taxes (usually escrowed)
- Landlord insurance premium
- HOA fees (if applicable)
- Property management fee
Variable Monthly Expenses
- Routine maintenance and repairs
- Lawn maintenance/Landscaping
- Pest control
- Utilities: water, trash, gas, electric (if paid by landlord)
- Annual or Occasional Expenses
- HVAC servicing/filter replacement
- Roof inspection
- Gutter cleaning
- Appliance replacement savings
- Major remodel/upgrades
Money to Set Aside Each Month into a Reserve Fund
- Vacancy reserve – save 5–10% of your monthly rent for vacancies
- Capital expenditure (“CapEx”) reserve, then budget away 1–2% of your property value each year for large expenses such as a new roof, water heater, HVAC unit, etc.
Maintenance reserves are an important part of any rental property expenses checklist.
Expenses to Track for Tax Purposes
- Mortgage interest
- Property taxes
- Insurance premiums
- Repairs & maintenance
- Property management fees
- Advertising, tenant screening fees
- Depreciation (this is a non-cash deduction – you don’t pay cash for depreciation, but it still lowers your taxable income)
- Home office expenses – if you manage the property yourself
Track your expenses and keep all receipts. A spreadsheet works well, or consider a property management app like Stessa or Rentec Direct, which integrates with QuickBooks. This will not only save your skin if the IRS ever audits you, but it can also show you spending trends.
Final Words
Real estate investing can be a vehicle for generating serious long-term wealth, only if you approach it like a business. Investors who fail to treat their purchases like hobbies. They ignore expenses and constantly react to problems rather than prepare for them.
Have a firm understanding of your costs before you buy. Know your operating expenses, account for reserves, and track your dollars. Tight numbers force you to make smarter decisions, which leads to better returns.
You don’t have to be an accountant to be a successful landlord. You just have to stay organized, stay consistent, and continue learning since the numbers will reveal all.
