Rental properties cost money to run. How can you calculate the costs?
Purchasing a rental property is a considerable decision with considerable financial implications. You need to find a location that is simple to rent and fits your budget. Then, before you make an offer, you will need to determine how to pay for your new investment property.
As a property owner and landlord, the goal is to end monthly with a positive cash flow. To decide whether a rental home is a wise investment, you must know the costs when estimating property rental expenses.
Forecasting Rental Property Expenses
- The amount you need to budget for maintenance depends on your area and the condition and age of the rental property.
- Landlord insurance plans usually cover the property, any attached structures, and landowner-owned property. The price will depend upon your property’s area and value.
- The property owner typically pays property management premiums every month. If you are considering employing a property manager, plan on saving 8% to 12% of your monthly rental income.
- Property taxes can be thousands more or less depending on your location in the United States.
- Besides making mortgage payments on your rental property, you will also have to pay the mortgage on an additional property if you live elsewhere.
- Actual utility costs will vary depending on where you live when estimating property rental expenses.
Calculating Your Return on Investment
Calculating your return on investment (how much money you make divided by your expenses) involves the following steps:
- Predict your annual rental income: Research rent prices for similar properties in the area to comprehend what you can expect to rent your structure out for. A rental property will earn a positive revenue if the monthly rent payment exceeds 2% of the purchase price.
- Forecast your annual expenses: When estimating property rental expenses, consider insurance, taxes, repairs, maintenance, any homeowners association fees, and mortgage, including interest.
- Establish your net operating income (NOI): Subtract your yearly rental income from your yearly expenses.
- Determine your total cash investment: Add your closing costs, down payment, and any upfront repair or renovation costs.
- Divide your net operating income by your total cash investment: This outcome will determine your ROI
Bottomline
The revenue percentage depends upon your area and your circumstances. For instance, a “good” ROI might look different in California than in Maryland. Research how your investment property compares to other rentals to determine whether it’s a good ROI for you.
Trust the Professionals at Clagett Enterprises for Your Realty Needs
If you’re looking for an experienced property management company, the perfect realtor for your property, or a professional to assist you during your purchase of any home, you can rely on Clagett Enterprises. Clagett Enterprises is a full-service real estate company with almost 30 years of experience in the Frederick and Western Maryland area. For assistance with commercial sales, leasing, management, and development and consulting, contact us online or give us a call at 301-665-6009. To meet our team and see some of our beautiful homes, follow us on Facebook and Linkedin.