Landlording & Rental Properties

Estimating Rental Property Expenses: Insurance, Property Taxes, Repairs, Vacancy Rate, and More

Expertise: Landlording & Rental Properties, Real Estate News & Commentary, Personal Finance, Real Estate Investing Basics
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One of the greatest advantages to rental properties is that the returns are predictable.

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Investors can forecast the cash flow and returns they’ll earn from a property before buying. How many other investments can say the same?

Where new investors run into trouble is underestimating expenses. They often ignore expenses simply because they don't occur every month and just assume a property's cash flow is "rent minus the mortgage."

It’s why so many new investors lose their shirts.

Here’s what you need to know about estimating each rental expense, so you can accurately predict the cash flow and returns on any property from now on.

Repairs & Maintenance

Like vacancy rate, maintenance and repair costs don’t hit you every month. But when they do, they can get expensive.

I typically budget between 12 to 15 percent of the rent for repairs and maintenance. Brand new properties probably won’t require major repairs as soon as older properties, but over the long term, you’ll have to replace every single component in the property. Budget for it starting from the first month.

The higher the neighborhood turnover rate, the higher your maintenance costs will be. The long-term tenant who stays 10 years probably won’t ask for fresh paint and new carpets every other year. But when you market vacant properties for rent, often you need to repaint, redo the flooring, and conduct other maintenance to attract the best possible tenants. High turnover is one reason why I no longer invest in lower-end neighborhoods.

Similarly, if you accept Section 8 tenants, you'll have an annual inspection, and you better believe the inspector will find at least a few repairs they'll require of you. It's how they prove to their boss that they're visiting every property on their rounds. Be sure to budget extra money for maintenance and repairs if you accept Section 8—I don't anymore, for that and other reasons.

Vacancy Rate

Too many new real estate investors ignore vacancy rate, because it's a negative expense—a lack of income, rather than a monthly bill. But at the end of the year, it has just as much impact on your bottom line. (See this visualization of how cash flow works.)

Vacancy rates vary by neighborhood. Hot, high-demand neighborhoods might see vacancy rates as low as 2 percent, while cooler, lower-demand neighborhoods could see vacancy rates at 20 percent or even higher. It’s up to you as an investor to do your homework on any given neighborhood’s vacancy rate before buying there and to include it in your cash flow calculations.

Ask around among property managers and landlords who operate in the neighborhood. Real estate investing clubs work well for this, and you can also find them in local real estate investing groups on Facebook or local threads on BiggerPockets.

Make sure you know this figure before investing!

Related: 3 Approaches to Finding an Area’s Average Vacancy Rate

Property Insurance

As a real estate investor, you should establish relationships with at least two local insurance agents who work with investors in your market.

Ask them about their policies: what different options cost, what they include, and what restrictions they impose on property types or neighborhoods.

You’ll develop a good sense for what to expect to pay for policies at different property price points. But you can always call up the agents for an exact quote before pulling the trigger on a new property.

Property Taxes

Of all the expenses you have to estimate, this is the easiest.

You know the annual property tax rate in that jurisdiction based on the assessed value of the property. And you know the assessed value can reset to the purchase price that you pay. That makes the math childishly easy.

If your jurisdiction charges 0.5 percent of the assessed value annually and you expect to buy the property for $200,000, then you can expect to pay $1,000 in property taxes.

The trick is to convert that amount to a percentage of rent, which is how you want to calculate your cash flow. That $1,000/year in taxes amounts to $83.33/month, so if that $200,000 property generates $3,000 in gross rent, the property tax comes to 2.8 percent of the rent (which you can round up to 3% to be conservative).

Property Management Costs

Whether you plan to hire a property manager or manage your rentals yourself, you still need to budget for property management.

Why? For two reasons, both of them good. First, you never know when you will become unable or unwilling to continue managing the property. You might have a health emergency, or have triplets, or take a demanding job that doesn't leave time for managing rentals. Or you might discover you hate being a landlord or just aren't very good at it.

young couple looking over financials in kitchen on computer and printed papers with piggy bank and money in view

Second, it’s a labor expense inherent in owning rental properties. Whether you do that labor or you outsource it to someone else, that labor expense is real. If you ignore it, then how can you possibly compare your returns on a rental to truly passive returns on an index fund or REIT?

Start building relationships with property managers in your market. Find out what they charge, and find one you like—even if you intend to self-manage. Don’t just budget for the monthly percent of rent collected, but also budget for new tenant placement fees. These typically cost one month’s rent, and I usually budget for one every two years, which comes to an extra 4 percent of the rent per year.

So, if you find a property manager who charges 8 percent of collected rents each month plus one month’s rent as their new tenant placement fee, plan on budgeting around 12 percent of the rent for property management.

Travel, Bookkeeping, & Miscellaneous Expenses

The other expenses involved in owning and managing rental properties are smaller but no less real.

If you self-manage, you will sometimes need to go visit the property physically. It takes time to track rents and expenses each month. It adds to the complexity of your tax return, and it adds time to how long it will take you to prepare.

Sometimes you’ll need to send eviction warning notices by certified mail or post them on the front door (or both). You'll have eviction filing fees, maybe even attorney fees. You'll have to pay for protective, state-specific lease agreements sometimes.

I lump all of these miscellaneous costs together and budget between 2 to 4 percent of the rent for them. They’re real, even if they’re not consistent or obvious. Ignore them at your own peril.

Related: 12 “Hidden” Real Estate Expenses That Blindside Investors

Final Thoughts

You can predict the annual yield and cash flow from a potential rental property purchase—if you get these numbers right.

Get them wrong, and you’ll lose money. I made terrible investments when I first started investing, because I didn’t know how to accurately forecast cash flow and expenses.

It takes some research on your part to get these numbers right for any given property. They don't call it "due diligence" for nothing—it's work! Many people don't have the patience to invest the time in that due diligence, which means they have a choice. They can either enlist others' help to do it for them, or they should find another way to invest their money that doesn't require the same amount of work.

How do you estimate your expenses? What numbers do you look for when you evaluate properties and neighborhoods for rental investing?

Leave a comment below.

G. Brian Davis is a landlord, personal finance expert, and financial independence/retire early (FIRE) enthusiast whose mission is to help everyday people create enough rental income to cover their ...
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    Jim Armitage Rental Property Investor from Massachusetts
    Replied 11 months ago
    Hi Brian, good review of all the expenses that should be considered when looking for an investment property. Thanks for sharing! I'm curious why you determine what percent the value is of the gross rent for every data point? I don't see that explained anywhere. In your example, if you know taxes are $83.33/mo why not just plug that number in rather than figure out that it is 3% of the gross rent? - Jim
    G. Brian Davis from Baltimore, MD
    Replied 11 months ago
    Hi Jim, as the rent and property value go up, most non-mortgage expenses rise too. I've found it easier to forecast expenses as a percentage of the rent, as a general rule of thumb.
    Danni Catambay
    Replied 11 months ago
    Great list of things to do. Still waiting for the "how-to" part.
    Costin I. Rental Property Investor from Round Rock, TX
    Replied 11 months ago
    Excellent article - here is the list I use to estimate rental expenses: 1) Mortgage 2) Mortgage insurance (PMI or MIP) or FHA Risk base 3) Property Taxes 4) City Taxes 5) HOA (Home Owner’s Association) Dues and Fees and Assessments 6) Insurance a) Property Hazard Insurance (0.3-0.45%) b) Flood Insurance c) Earthquake Insurance d) Umbrella Insurance 7) Vacancy Rate (usually 8% - the equivalent to one month a year, or 5-6% if multifamily and/or if experienced, if not use 8%) 8) Utilities (you’ll have these if your tenant is not covering them and/or during vacancy) a) Water § Sewer § Garbage b) Electricity c) Natural Gas d) Propane 9) General Maintenance (usually 5%) a) Upkeep § Landscaping b) Snow removal c) Repairs d) New Appliances e) Make ready 10) Capital Expenditures (usually 5%, higher is the property is old and obsolete, less if fully rehabbed and all mechanicals and roof are new) 11) Property Management (8%, even if you self manage, your time still has value and there might be a time when you'll want to be completely hands off or you'll not be able to do it, vacation, retirement, etc.), including... a) Office Supplies (e.g. stamps, envelopes) b) Software c) Gas/Mileage d) Advertising + Payroll e) Concessions f) Lease loss g) Lease renewal fees 12) Lawyer/Law office/Legal fees 13) Accounting/Bookkeeping/CPA/Tax preparer/Tax advisor
    Olinka Calderon
    Replied 2 months ago
    Thank you very much Costin!. I am a newbie.
    G. Brian Davis from Baltimore, MD
    Replied 11 months ago
    Thanks for sharing Costin!
    Liz Wolf
    Replied 11 months ago
    This list is super helpful. Thanks from a newbie landlord.
    James Krusmark Rental Property Investor from Tacoma, WA
    Replied 11 months ago
    Triple check your insurance numbers. Insurance has been the single biggest headache I've encountered to date. In podcasts and blogs, they like to throw put numbers like $100 as an estimate for insurance. That's not even close to accurate for a normal homeowners policy in my area, let alone a house hack or multifamily policy.
    G. Brian Davis from Baltimore, MD
    Replied 11 months ago
    Great point James! And it can rise unexpectedly on you - that's happened to me more than once, and significant jumps, too.
    Rick Klopp from North GA
    Replied 11 months ago
    Great article and a good reminder that the “little things” that often go overlooked can really impact your annual cash flow.
    G. Brian Davis from Baltimore, MD
    Replied 11 months ago
    Thanks Rick, and it's so true - it's the little things that make the difference between new landlords' forecasts and their actual returns!
    Dave Rav from Summerville, SC
    Replied 11 months ago
    Good overview. definitely comprehensive. Speaking of turnover and Sect 8, a buddy of mine is experiencing that now. A long-term tenant of 4 years recently switched over to S8. She then proceeded to move out less than year later, leaving the home filthy and in need of repair. Low income, high turnover neighborhoods pose challenges for sure.
    G. Brian Davis from Baltimore, MD
    Replied 10 months ago
    Thanks Dave, and I'm sorry to hear about your friend. I've been there, and no longer invest in those neighborhoods.
    Mark Reiland from Iowa City, IA
    Replied 11 months ago
    Great article, Thanks for sharing. Glad to see your estimate of maintenance at 12-15%. They never show that on the proforma. :)
    G. Brian Davis from Baltimore, MD
    Replied 10 months ago
    Thanks Mark, glad it was useful for you!
    Laurence T. from Sharon, Massachusetts
    Replied 6 months ago
    Why did you not list utility costs? Water, sewer, public electric...