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Author Topic: Operating expenses really half of rent?  (Read 3831 times)

Offline Faceplant

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Operating expenses really half of rent?
« on: April 25, 2012, 08:26:07 pm »
Any seasoned residential investors out there care to share the experience they have had operating rental houses? Are the yearly repairs average HALF of the yearly rent collected? If rent collected is $700, is $350 put back into the property every month?
* I am an avid outdoorsman and photographer, hence the trail name "Faceplant", its funny if you get the joke.

Offline Gold River

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Re: Operating expenses really half of rent?
« Reply #1 on: April 26, 2012, 02:03:13 am »
Hi,

    Does 33 season's and over 1000 properties count for experience? I was beginning to think I had done it all wrong for 33 years!

Ok, 1% of value for maintence for an owner occupied home per year!

A rental on the other hand requires a larger budget!

Effective Rental Expense Budget

1. Property Taxes - Generally speaking my lowest valued rental has a property tax bill of about $1100 dollars a year or approximently $92 dollars a month!

2. Property Insurance - Generally speaking my lowest valued rental has a property insurance bill of about $750 a year or approximently $62 dollars a month!

3. Flood Insurance - Generally speaking flood insurance at minimum can cost an additional $480 plus per year or approximently $40 plus per month!

3. PMI (Principle Mortgage Insurance) - If you borrow over 80% in either a single loan or agregate of loans it can trigger PMI which can cost an additional $360 plus per year or approximently $30 dollars plus per month!

4. Maintence - Not only 1% of value per year but additional cost's of plugged drains and toilets and other direct cost's of specifically being a rental!

5. Appliance Repairs - We supply refrigerator / freezer, stove / oven, dishwasher, microwave / vent and garbage disposals, when these appliances are new there's little maintence but after 5 years problems occur, we probable average $150 dollars in labor and parts for a repair of some kind per year or $12 dollars a month!

6. Replacement Reserves - Carpet, water valves, shower / tub valves, vynal and wood flooring, door locks, painting unit, etc. We probable spend the money to repaint our rental homes once every 3 or 4 years, we average replacing carpet every 7 or 8 years, shower / tub valves and kitchen / bath faucets probable need replacing every 6 to 8 years while wood or vynal flooring may go 7 to 10 years!

7. Major Remodel Reserve - Bathroom remodel every 10 years, Kitchen remodel every 15 years, whole house remodel every 15 years, new roof every 20 to 25 years, exterior repainting every 6 to 8 years!

8. Property Management Cost - 8 to 10% of gross income!

9. Legal - I average about $300 to $500 dollars every 2 to 3 years in my house's!

10. Advertising - $50 to $150 dollars every vacancy!

11. Pool Maintence - $100 per month chemicals and maintence - Equipment repairs, hoses, pump, filter, heater replacement every 10 years and basic replacement yearly!

12. Yard Maintence - Timer replacement and electric valves replacement every 5 years or so! Lawn Care, tree care, plant care yearly or bi-yearly!


                  Gold River
« Last Edit: April 26, 2012, 02:09:53 am by Gold River »

Offline jmd_forest

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Re: Operating expenses really half of rent?
« Reply #2 on: April 26, 2012, 06:16:25 am »
Another big expense: Vacancy. The other expenses you MUST pay do not stop between tenants.

Offline Dave T

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Re: Operating expenses really half of rent?
« Reply #3 on: April 26, 2012, 06:22:49 am »
Experienced investors with a multiple property portfolio will tell you that, YES, the rental property cost of ownership and operation does tend to average about 50% of "scheduled" rents over time.

Will each property cost exactly 50%, no.  Will the average for a group of properties be 50% every year, no.  There will be some years when the average will be lower, and some years higher.  But, over time, the average will tend to be about 50% of scheduled rents per year.

GR gave you some elements of costs.  Don't overlook vacancy.  Whenever I have a rental turnover, I always have a month or two of vacancy.  This is a month of expenses with no income and vacancy does drive up the cost of owning and operating a rental property.

We landlords have come through a couple of lean years where the glut of rentals on the market forced rents down.  Tenants were successfully able to negotiate lower rents, no rent increases on renewals, and vacancy periods tended to be longer.  Meanwhile, property taxes and hazard insurance premiums still went up.  I bet for those years that the average cost of owning and operating a rental was closer to 60%.

The bottom line here is that the 50% rule is just an estimate until you run a detailed cash flow analysis.  Use the 50% rule to screen potential properties, then do a detailed cost analysis to refine your numbers.  After you have more exact numbers, you will know if the property is likely to cash flow.
« Last Edit: April 26, 2012, 06:25:13 am by Dave T »

Offline Faceplant

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Re: Operating expenses really half of rent?
« Reply #4 on: April 26, 2012, 04:08:33 pm »
If half of the rent is expensed back into the property, how can anyone make cash flow without putting 50% down on the property? Subtract 50% for expenses and the rest goes to principle, basically.
* I am an avid outdoorsman and photographer, hence the trail name "Faceplant", its funny if you get the joke.

Offline justin0419

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Re: Operating expenses really half of rent?
« Reply #5 on: April 27, 2012, 11:12:23 pm »
You have to get a good deal on a property to make it work out.  You can't go buy a decent middle class type house for 80k that rents for $750/mo and expect it to make money.  It won't work.  The market will only tolerate so much for increased rent.  A few years ago I lived in an area where tons of people got stuck with their homes because prices crashed and they couldn't afford to sell so they decided to rent.  There was a good amount of rentals on the market.  These houses cost 250k or so and would only rent for about $1500.  The numbers just don't work on things like that.  There are TONS of people out there who rent out a house and have to supplement it each month just to keep afloat.
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