If you’re going to be profitable as a Houston landlord, you’ll need to have a clear idea of what your expenses are—and how much revenue you’ll be generating. But estimating expenses is more complicated than it seems at first, and if your calculations are off even slightly, it could spell ruin for your entire operation.
New landlords often find it difficult to estimate expenses accurately, but there are several strategies that can make it much more achievable.
General Tips for Estimating Expenses as a Landlord
Let’s start with some general tips for how to estimate expenses as efficiently and accurately as possible:
- Estimate conservatively. You’re always going to be better off when you estimate your expenses conservatively. Being surprised that your expenses are lower than you thought means you’ll be more profitable, while being surprised that your expenses are higher than you thought means your profitability model could be entirely compromised.
- Rely on multiple sources of data. If you only rely on one source of data for your calculations, it’s easy for your estimations to be off. Instead, try to consult multiple sources before you come to a firm conclusion. For example, look at historical rent prices for your property as well as current rent prices for similar properties in the area before you determine what you can charge.
- Keep accurate records for the future. This is especially important if you’re managing multiple properties, but keep a log of everything you buy for the property, and all your bills. The more information you have, the better estimates you’ll be able to make in the future.
Now, let’s take a look at all the different types of expenses you should consider when making your estimates.
For starters, you’ll need to know how much you’re going to owe on your loan payment—if you have one. Any mortgage calculator can easily answer this question for you. As long as you have a fixed rate loan, you can generally rest assured that this rate isn’t going to change, so it’s going to be a fixed monthly fee you can reliably incorporate into your calculations.
Property taxes are a little trickier to estimate. When you purchase your property, you should get a record of previous property taxes paid, but you can also consult your local government’s website for more detailed information. If you’re in escrow, you’ll pay property taxes at the same time as your loan payments, in monthly increments, and you’ll get an estimate for these monthly costs from your financial institution.
That said, your property tax rate can vary from year to year. The rate itself could change or, if the local government decides to audit your property value, they may find that you owe more per year (due to the increased value of your home).
Next, you’ll need to estimate how much you’ll pay in insurance. For starters, you’ll want to get property insurance on your physical property—and this may be required if you’ve gotten a loan to pay for that property. But you should also consider getting landlord liability insurance, which will protect you if you’re found liable for damages—such as if a tenant is hurt at your property by something that should have been fixed.
In some cases, landlords (the property owners) are responsible for paying the utilities. If that’s the case, you’ll want to use historical estimates to determine how much you can expect to pay. Consider natural gas, electricity, water, sewer, garbage collection, and other types of bills.
Do note that in many areas, tenants will be responsible for these costs by themselves, so you won’t have to factor these into your calculations at all.
Maintenance, Repairs, and Emergencies
Every landlord wishes their property was entirely hands-off, but that’s simply never going to be the case. All properties require occasional repairs, maintenance, and emergency adjustments. You’ll find varying estimates on how much you should plan on spending here, but the general rule for property maintenance is one to three percent of the property’s value, per year (depending on the condition of the property). Remember the general rule to estimate conservatively here—it’s much better to over-plan for emergency expenses and have a surplus at the end of the year than to under-plan, and end up short for a necessary repair.
Additions and Improvements
Depending on your goals as a landlord, you may also want to budget for regular additions and improvements. If you’re interested in keeping the property as attractive as possible and holding it for the long term, you’ll want to have a bigger budget for ongoing changes, so you can keep it up-to-date and as lucrative for your incoming tenants as possible. Because most additions and upgrades are purely optional, there’s no way to estimate what you “should” be spending—that’s entirely based on your discretion and your personal goals.
If the property is part of a homeowner’s association, you’ll need to make sure you budget the HOA fees into your plans. These range from hardly noticeable to expensive, but you should be able to get a firm estimate by contacting the HOA directly. Do note that these fees can change over time, due to changes that may or may not be in your control (like new community features or restrictions).
Marketing and Advertising
Don’t forget to include a budget for marketing and advertising. When your property is vacant, you’ll be losing money, so you’ll need to fill it with tenants as quickly as possible. The only way to do that is to increase the visibility of your property—ideally through marketing and advertising, which can cost several hundred to several thousand dollars per campaign.
Property Management Fees
Being a landlord takes up a lot of time, but you can make it easier on yourself by working with a property management company. Property management fees tend to be fixed, based on the value of your property and a few other factors, so they’re ridiculously easy to estimate. And they might even take the place of your other fees, making your entire estimate easier—for example, you may not have to budget for marketing and advertising if your property management firm finds new tenants for you.
You can make your life much simpler—both in terms of estimating expenses and in terms of ongoing management—by enlisting the help of a property management firm. Contact Green Residential today, and we’ll help you find the best combination of services for your properties—so you can affordably keep your rentals in good order and stop worrying about whether or not you’ve estimated expenses properly.