Being a real estate investor can be a fun and lucrative endeavor. It can also allow you a fair amount of freedom since you get to decide how hands-on you want to be. Rental properties can be a reliable source of passive income, but as you start adding up how much you will be collecting in rent each month, don’t forget about the expenses that you will have to cover along the way. Understanding the expenses that you can expect as a property owner and keeping careful track of your cash flow will help you run a more successful business and retain good residents.
What Rental Property Expenses Should You Expect?
Once you have purchased your property and it is ready to rent, here are some of the common costs that you can expect as part of operating a rental property business:
- Marketing and advertising fees. Don’t forget that you have to actually advertise your property so that you can get the best possible applicants. You may want to post signs in the yard and take plenty of pictures so that you can market on rental websites.
- Resident Screening. Many property owners require both a credit and criminal background check. You may be able to have these costs covered with an application fee, but it is important to take this potential cost into account.
- Maintenance Costs. Your best strategy for keeping repair costs down is to schedule regular maintenance. This can include everything from pest control to HVAC cleaning and inspections. Also, plan for larger maintenance projects, like eventually replacing the roof.
- Emergency repairs. As a property owner, you will need to be able to quickly address any emergency repair needs. Be sure to set aside funds in a special reserve account so that you are always prepared. While you can’t predict what will happen, it is safe to assume that something will need repairs. It can be anything from a downed tree to a burst pipe. Either way, you need to be ready for this expense.
- Vacancies. Hopefully, you are able to find new residents and quickly turn around your property, but there will be a certain period where the rental is vacant, and you will need to cover the cost of utilities and any repairs or upgrades that need to be made to make the property rental ready.
- Property taxes. This is another annual expense that you can prepare for as you establish your business and your accounts.
- Pest control. If you want to protect your properties and attract and retain good residents, you need to invest in regular pest control services. Fortunately, these services can be scheduled well ahead of time so that you don’t have to find yourself scrambling as the seasons change.
These are all relatively “fixed” expenses that you can expect to encounter as a property owner. Ideally you will only have to experience short periods of vacancy, but it is always better to be financially prepared for longer periods while also using all your resources to find new residents.
Rental Property Expense Tracker
Tracking all the different expenses, both fixed and variable, which are a part of owning and renting properties can feel overwhelming. Fortunately, in 2022, technology has streamlined the tracking process and automated many of the processes associated with being a property owner. At the same time, it is up to you to stay organized so that you can begin to take advantage of tracking tools in the first place.
Tracking your expenses help you better understand cash flow and whether your business is successful. A bonus is that many of these expenses are tax deductible. Here are just a few operating costs that you will be able to claim on your annual tax return:
- Vehicle and travel expenses
- Licenses
- Mortgage interest
- Office supplies
- Property taxes
- Property insurance
- Technology and software
In addition, real estate investors can claim a depreciation deduction so that their net income is lower. In fact, property owners can deduct both the costs of buying and improving rental properties. Traditionally, rental property depreciates by 3.636% annually for 27.5 years. The period of depreciation begins as soon as the property is available to rent. Over time, the depreciation deduction can offer significant savings that help to make real estate investing more viable.
To take advantage of these tax breaks, you will have to keep organized records of all your purchases and receipts. You will have to be able to prove that you incurred the expenses and the last thing you want to have to do is go searching for a physical receipt months after you made the purchase. Owning and operating rental properties can involve a lot of paperwork, this is something you will want to stay on top of.
Property Management Tools
With so many affordable automated software tools available, there is no reason to manually keep ledgers and wait for checks to arrive in the mail from residents. These software programs can also create a portal where you and your residents are easily able to communicate. They can send maintenance requests and you can use the same software to collect and screen resident applications. Many software programs also offer a smartphone version so that you can access the app at any time and quickly address issues as they arise. In addition, all the information you enter will be saved so that it can easily populate into records and statements that will simplify your tax filings.
How to Keep Track of Rental Property Expenses
If you don’t want to invest in a software or product that could come with a monthly subscription fee, then there are simple and cost-effective ways to track your rental property expenses. An Excel or Google sheet is enough to track all the numbers. Be sure to create a separate sheet for every property you own so that nothing gets mixed up.
It is smart to keep hard copies of all your receipts so that you can easily resolve any disputes or answer questions. If that is just too much paper to have laying around, you can take advantage of storage services that allow you to upload all your receipts so that you have a digital copy saved and easily accessible.
Don’t stress about immediately entering each purchase into your software or sheet. If you set aside one day per month to manage your bookkeeping tasks, you should be able to stay organized without having to constantly jump on the computer.
Finally, it is highly recommended that you keep separate business and personal accounts. Again, this is just a simple way to better track your finances without any added confusion.
Tracking expenses might not be your favorite part of being a property owner, but it is a necessary task. Don’t be afraid to take advantage of the latest technology to automate and accelerate tracking. In the end, careful record keeping could save you money and help you avoid headaches. For additional help with your record tracking and other owner responsibilities, contact DECA Property Management and learn more about how we can help.
