You’re driving on an isolated highway late at night, completely dependent on your vehicle. It would be unthinkable for you not to know what your fuel level is at any given time— it’s your lifeline. For real estate investors, the income from their rental properties is their lifeline. For this reason, you need a plan which helps you carefully track your expenses. Mapping them out is a great start. However, in order to be able to do this, you have to know exactly what they consist of.
To that end, we’re taking a look at the myriad expenses associated with real estate investing.
Let’s first go over why it’s vital.
Why It’s Important to Know Your Expenses
Not knowing your expenses, when it comes to owning an investment home, can diminish your overall returns. Because every unaccounted expense takes away from your projected revenue. By knowing your monthly expenditures, you can be confident that you will be able to carry out your investment, long-term, and receive the returns you planned for.
As Warren Buffet says: “Risk comes from not knowing what you’re doing.” Expense-tracking will reduce your risk by giving you a clear idea of what to prepare for and how.
List of Expenses
Acquisition Costs of Real Estate Investing
Acquisition costs come from acquiring the income property and depend on the type of funding you use. Costs may include the initial home cost or down payment (if using financing), closing, loan, acquisition, and rehab costs.
|If you pay all cash, this is the price you agree to pay the seller. For financing, this is the amount of your down payment.|
|+ Closing Costs||Typically 1.5% of purchase price.|
|+ Loan Costs||Typically 2% of loan value.|
|+ Acquisition Cost||Typically 3.5% of purchase price.|
|+ Rehab Costs||This includes any cost associated with getting the property ready for the next tenant; typically given by inspector.|
Monthly Costs Associated with Real Estate
Owning a property comes with various monthly costs that you must budget into your returns; here’s a detailed list of some monthly expenses that you can expect to incur:
- Mortgage payments (if you finance; to best calculate, use an available online mortgage calculator)
- Taxes (varies by state and county; contact the local county tax assessor’s office for more info)
- Insurance (varies by region; contact your insurance provider for info)
- Home Owner’s Association fees (varies by property; contact your real estate agent for info, if applicable, since not all properties have HOA fees)
- Asset Management (typically 10.5% of monthly rent)
- Maintenance (allocate 6-10% of annual gross potential rent for unplanned repairs)
- Leasing fees to cover finding new tenants (typically around 75% of one-month’s rent per year)
Your investment represents your future security. Now that you know your expenses, you’re in need of a little more certainty…
Do the Math!
Now that you’ve done your research, and you’re aware of the importance of tracking your expenses, it’s time to crunch some exact numbers and make sure your property will provide you with the returns you seek.
We recommend downloading our helpful ROI sheet to help you on your investment journey and calculate your returns as accurately as possible.
Accurately calculating ROI can be time-consuming; make it easy for yourself by searching for investment properties on HomeUnion®. There are hundreds of pre-vetted, cash-flow properties ready for you to view, and you can even breakdown the expenses by property without ever needing your calculator. We show you all the calculations you need to make an informed buy decision.
And even after you purchase an investment property with HomeUnion®, we still give you a detailed look at your income, expenses, and cash flow every month on the Income Statement. Just another way we are completely transparent with our investors!