Buying Your First Rental? Be Sure To Do The Right Math!

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I was recently speaking with a new investor (let’s call her Maya for simplicity) who is looking into acquiring single family homes as rental properties.  The conversation we had about her expected net positive cashflow on a particular property reminded me that it’s so important to understand the basic mathematics for real estate to ensure that you know what you’re getting yourself into.

Maya forgot (or was simply unaware of) several of the basics when calculating expected cashflow on her single family home investments.  This could have led to a less than desirable scenario for sure — it could have been the difference between having a positive cashflow or a negative cashflow.

In case there are others like her who are thinking about getting into their first rental and trying to determine cash flow, I thought I would share the things that she did NOT account for because these are likely easy items to forget.

Property Management

Maya did not intend to hire a property manager which is perfectly fine, but it’s important to include property management as part of your expenses anyway.  You never know when you may change your mind and want (or need!) to hire one, so it’s safest to include this expense. In many markets, this cost would be 10% of the expected rent, but you’ll want to figure out the standard for your area.

Taxes

It’s easy to access the property taxes for a property with a quick online search of public records.  Maya did just that, but there was a little problem with her calculation.  Florida is a homestead exemption state like several other states within the U.S.  Every person who owns and resides on real property in Florida and makes the property their permanent residence is eligible to receive a homestead exemption which makes up to $50,000 of the property value exempt from taxes!

Needless to say, the property taxes were going to be significantly higher for her as an investor. Be sure to get an accurate property tax estimate.

Vacancy

You can’t exactly expect to have zero vacancy with your rental property.  If you’re purchasing a vacant property, you have to consider that there could be several weeks delay in getting a tenant in the property.  She didn’t consider the fact that there’s no cash flow happening when there is no tenant! You also want to account for the cost of advertising and marketing the property to potential renters, including the costs of credit/background checks if applicable.

Easy-to-Forget Maintenance

There are small maintenance items that can easily be forgotten but need to be accounted for.  She certainly gave thought to estimated repairs, but forgot about those regular things that are done such as bi-weekly lawn service, exterminators, etc.  For those in cold weather climates, things such as shoveling snow may be a consideration.

Maya is still enthusiastic about purchasing rental property and fortunately she’s learning to do the right math before she gets herself into a sticky situation.  Perhaps this post will help other new investors to do the same!

Editor’s Note: If you’re interested in reading more about the average expenses of a rental property over time, please be sure to check out the 50% rule as discussed many times on our forums.

About Author

Shae Bynes is a real estate investor in Sunny South Florida. On her blog, GoodFaithInvesting.com, she provides helpful tips and an inside look at her real estate investing adventures -- obstacles, failures, & successes!

7 Comments

  1. Shae,

    Its an eye opener for most first time landlords. Around here PM start at 10%, but many forget to include the lease up fee which ranges from 25%-100% first months rent. That can be another 2-8% on top of that 10%. 50% rule is a great back of the napkin estimate.

    Working backwards from desired cashflow can also help in making your offer price.

    Good Stuff. Another great post Shae.

    Jason

  2. Nice article, Shae!

    Just thinking about these expenses makes me cringe. And, that is a great story about the homestead exemption – it does change for an investor. It’s kind of crazy because this exact situation has happened when buying newly developed homes not only for homeowners but for investors as well.

    Basically, I’ve heard stories that with the newly developed homes the taxes may be based on the land value in the beginning stages (i.e. before the home is built and placed). Then, I’ve heard that developers try to sell these homes to both homeowners and investors with a tax assessment value based on the land. And, it’s not until the following year when the tax assessor comes around again that the new value (i.e. home with the land) gets taxes at a much higher figure. It’s kind of crazy, I’ve heard of folks who have bought after the fact only to find out the taxes are much higher than they thought – it’s really a sticky situation!

    I enjoyed the article, thanks for sharing!

    p.s. And, let’s not even get into HOA. I have a friend in a condo development whose HOA has been planning to get a new roof for the entire building. And, they want to collect 4k from each homeowner just to do that. Crazy, crazy, crazy! 🙂

    • Rachel, your P.S. is exactly why I don’t invest in condos and townhouses with Homeowner’s Associations. Been there, done that…our first rental property was a townhouse and boy did we have issues. The assessments are the absolute worst!

  3. Shae,
    Great advice. When I bought my first two rentals I didn’t account for maintenance and also miscalculated taxes. Boy, did it cost me! This also is good reason to have mentors or a nice group of fellow investors willing to share info and help.

  4. Ayodeji Kuponiyi

    Great article Shae! Income – Expense = Cash Flow. Just to add on th kind of Expenses:

    Taxes, Insurance, Water, Sewer, Garbage, Flood Insurance, Electricity, Vacancy, Loan Point,/Fees, Lawn Care, Snow Removal, Management Fees, and Repairs.

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