How do you determine costs for a new rental property?

5 Replies

Hi everybody

My wife and I are looking to buy our first rental property, but we are not sure the best way to account for reoccurring costs. We know we need to plan for things like repairs and maintenance, but don't know how much. Besides from the obvious like taxes, insurance and repairs, is there anything else we should be looking out for?

Any advice you can give would be greatly appreciated.

You can search for the 50% rule here.  Basically it says over time, over a portfolio, expenses will tend to be about 50% of rental income. (not including mortgage principal and interest) Lacking hard data to the contrary, I would never estimate lower than that. 

Some of the very old posts on the subject went into the data that brought about the rule.

Jack,

You are asking a loaded question. The best thing to do is to surf the forums and the blog - there is an awful lot of information on the subject :)

When I do my deal analysis, I always figure (among other things) 10% vacancy, and subtract 10% from gross rent for regular maintenance.  Make sure you're figuring for any utilities paid by the landlord.  Around here landlords usually pay for trash pickup, and communal electric (hall and exterior lighting).  Depending on your property type you may need to account for snow removal and landscaping.  

Here's an excellent spreadsheet that's helped me analyze a bunch of deals:
https://www.biggerpockets.com/files/user/jasonscott/file/20-sfh-rental-analysis

It all depends on the condition of the property and the age of major replacement items like a roof or hvac systems.  For me, I want to have surplus cash on based on 5-7% of the house value for anything major.  I have set aside 3 months of mortgage plus $1500 for carpet/paint replacement cost as well.   

I have just started out as well, and now into my second year of renting out my old house with a initial 2yr lease. Before moving out I replaced the hvac system and water heater.  I am not expecting any major repairs soon and if I do have some I bet I can take it out of the deposit.  By Aug 2016 I will be set up nicely.

Originally posted by @Jim Adrian :

It all depends on the condition of the property and the age of major replacement items like a roof or hvac systems.  For me, I want to have surplus cash on based on 5-7% of the house value for anything major.  I have set aside 3 months of mortgage plus $1500 for carpet/paint replacement cost as well.   

I have just started out as well, and now into my second year of renting out my old house with a initial 2yr lease. Before moving out I replaced the hvac system and water heater.  I am not expecting any major repairs soon and if I do have some I bet I can take it out of the deposit.  By Aug 2016 I will be set up nicely.

 It can be a perplexing question... And the answer as Jim and others aver is : it depends. There are rules, like 10% , but maybe the exceptions swallow the rule with older rentals....

I have a 80's era fourplex and it had some deferred maintenance, so repairs and maintenance eclipsed the 10% mark in early years (previous owners squeezed all the juice from the property). But it comes in closer now to the benchmark, but  I do much of the work myself (so I am mostly just materials there and hiring it out would put us over 10% still). 

Also, a lot of small investors forget reserves. I am big fan, also like Jim, of setting aside reserves for major system and their expected replacement date (based on useful life). Simple example: your 4 plex roof at purchase has ten years of useful life and replacement is estimated at 10K... try and set aside $1,000 per year on that (same for HVAC, driveway, windows, etc).. But any simple system would work. Clearly, a new build or very well maintained property would require less monthly in repairs, but these often sell at a premium.