032: Estimating Expenses – Friday Fundamentals

Estimating Expenses

It’s important to be able to determine expenses of a property, since they directly impact the property’s cash flow. Some expenses are obvious and easy to calculate, whereas other expenses can be less intuitive and harder to accurately estimate.

Let’s look at what typical expenses are for almost every property.

  1. The Principal and Interest. The principal and interest combined are known as your mortgage payment, or P&I. The P&I can vary greatly depending on the interest rate, loan amortization (or duration), and loan amount. It’s best to find an online amortization schedule which allows you to input each of these variables, like this one here by BankRate: Mortgage Calculator
  2. Taxes. Property taxes can make up a significant portion of your expenses, and vary by state, county, and even city. Property taxes typically range from 1%-3% of the property value. You can check past property taxes on your local county tax assessor’s office. Most tax assessor’s offices will have a website or database you can search by name or address. Keep in mind that past tax assessments aren’t indicative of future tax assessments. A property will often be re-appraised by the county tax appraiser upon a sell. The new tax assessment is then based on the new appraisal. So if the property has been appraised under a current owner at $50,000, and then is sold for $100,000, expect the property taxes to increase. This is an important evaluation when looking at expense projections!
  3. Maintenance. There are two types of maintenance costs: operating expenses and capital expenses. Operating expenses are every day repairs and maintenance, such as fixtures, locks, garbage disposals, cleaning, etc. Capital expenses are big ticket items which you repair less frequently, like a new roof, HVAV, kitchen remodel, flooring, etc. It’s recommended to set aside approximately 5% of rents for each expense, for a total of 10%.
  4. Insurance. Insurance is one of those expenses that can vary, based on property type, location, the deductible, etc. It’s best to get an insurance quote from an insurance agent/broker.
  5. Management. This is often an overlooked expense. Even if you plan to self manage, its still wise to build in property management in your projected expenses. You could change your mind after you have self-managed the property and will want to be able to afford to hire the property management out to a professional. Also when you sell the property, the buyer will likely price in property management in their analysis. Property management for single family properties and small multifamily properties typically ranges from 8%-10% of the rents.
  6. Vacancy. When a property is vacant, you don’t receive rent on that unit. Even in strong markets with high demand, you will have turnover, leaving the property vacant for days or weeks with no income. You’ll also be turning that unit for the next tenant, during that time. Depending on your market and property type, vacancy can vary. For single family and small multifamily, 6-10% of rents is a fair estimate.

So typical expenses for a property are: P&I, Taxes, Insurance, Management, Maintenance, and Vacancy.
If you can quickly and accurately estimate these expenses, you can more easily analyze deals and make offers on properties, which will lead to you buying more deals and good deals!

For a great online calculator, I recommend starting with the rental property calculator on BiggerPockets.

So get out there and start analyzing deals. The more deals you look at, the more comfortable you’ll be estimating these expenses, and the more offers you can confidently make, which will lead to more properties for you!

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