How much does it REALLY cost to own investment properties?

Balancing the Books on Real Estate Investing

There seems to always be hype around owning investment properties. Proponents of real estate investing tout that this is the best way to create secure passive income and work towards generational wealth. It all looks fantastic and straight forward: find a good property, put a little money into it to make it rental ready, throw in a super responsible tenant, and voila, you’re off to the races.

But, what about if and when things go off track, maintenance costs accumulate, tenants can’t pay rent, taxes and insurance increase, vacancy goes up? How much does it really cost to own investment properties? 

This is not an easy question to answer. Like so many other things, what it actually costs to own rental properties can fluctuate dramatically with the type of property you’re buying, market conditions, rental rates and other factors like deferred maintenance.

In addition to actual monetary expenses, the amount of time and energy you may need to put into an investment property can also take a toll. 

It’s critical to run the numbers first to make sure that your head thinks it’s a good financial investment before you get your heart set on a property.

When I’m considering purchasing an investment property, I spend some time creating estimates on costs to determine if the property will likely be profitable and how long it will take to get there. 

Here’s some quick, back of the napkin math I use to evaluate a property before I get serious about it.

Income

1. Market rate monthly rent– Isn’t this why we’re doing this?! Let’s get that cash flow flowing. How much can you rent the property for at the current fair market rate? This will vary depending on the type of rental you’re planning on. For example, if you’re thinking of an unfurnished house with a 12 month lease, your monthly rent will likely be lower than a furnished vacation rental. My advice, take a look at the properties currently on the market to figure out where the ball park market rent is landing. Don’t forget to reevaluate your rental rate if the market changes…because it will!
2. Other amenities available for purchase– Offering any other amenities that will add to your rental income? Storage, bike parking, garage, etc. 

Expenses

1. Mortgage– How much will the money payment be if I take a mortgage.
2. Insurance– Will insurance be included in the mortgage payment. Will I need any special types of policies like flood insurance? Is the property in a hard-to-insure area that would make the policy super expensive? 

*Pro-tip: Before you even offer on a property, talk to your insurance rep to make sure there won’t be any hiccups down the road. 

1. Taxes– Are property taxes being paid through the mortgage escrow account or will you need to set money aside for these?
2. Utilities– Are you paying for utilities (some or all) or will your tenant(s) be paying? 
3. Start Up Capital– Will you need to put any money into the property before it makes its first buck? 
4. Maintenance and repairs– Generally, I set aside 8% of the gross income per month for maintenance and repairs. This may need to be higher or lower depending on the location, age and function of the property. 
5. Turns– If you’re planning on doing a longer lease, then in theory, you should need to turn the property over less often. This can save on turns especially if you find tenants who tread lightly on the home. However, if you’re thinking of doing a short term vacation rental (STVR) or shorter leases, turns can really add up. 
6. Furnished or unfurnished– Depending on the market, having a furnished rental can attract higher paying tenants like travelling medical professionals or executives. This requires you to cough up a bit more start up capital, but may be worth it depending on your target tenant.
7. Property Management (PM)– In the Grand Valley, property management companies typically take about 10% of gross monthly income. That puts less money in your pocket, but also may give you less headaches (or maybe that’s just me). If you’re thinking of using a PM, make sure you know the terms and how much this will cost you before you sign a contract.
8. Carrying cost– If your rental market is fairly slow, factor in what it will cost you to pay all the expenses for the property for the months it will take to rent it, turn it or get it ready to market. Oh, and I include lawyer fees in carrying costs too.

On first glance, the expense list may seem to greatly overshadow the income list. 

That is why it’s SO IMPORTANT to get a realistic estimate of your expenses vs. income. 

If the income is greater than your expenses, that’s a good indication that the property has promise. I’ve had clients be all cash flow focused, or some who tell me they’re happy with the equity increase as long as the property is breaking even (income = expenses).

Take a moment to consider your investment goals. Are you looking for cash flow, equity growth or both? You might enjoy reading my post about investment goals. 

Interested in properties that might help you meet your goals? I can set up a no-pressure search that will alert you when properties that meet your criteria become active. 

Drop me a line to get your search started.

Your property investment specialist,

Alanna

 

Alanna Spees, REALTOR®
Text/Call: (408) 497-3774
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*All content is human generated and AI edited (because spell check is my friend).
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