It may seem like any cost associated with your rental property is an operating expense, but this is often not the case. Costs that directly impact the operation of your rental business are considered rental property operating expenses, but tracking the wrong expenses can result in incorrect financial reporting, making it harder to know exactly how well your rental business is performing.
We guide you through the process of identifying and calculating rental property operating expenses so that you can track expenses correctly as a landlord.
What Are Operating Expenses for a Rental?
Rental property operating expenses affect the day-to-day operations of your business and are necessary to manage a rental property. Examples of operating expenses to expect as a landlord are the following:
- Advertising
- Auto and travel if you commute to your rental
- Cleaning and maintenance
- Landlord insurance premiums
- Legal and other professional fees
- Property management fees (if applicable)
- Mortgage interest that’s been paid for the year
- Maintenance and home repairs
- Landlord software fees
- Property taxes
- Homeowners Association (HOA) fees
- Utilities
- Depreciation expense
The expenses listed above will also need to be added to your 1040 tax form, so it’s important to track how much you’ve spent in each category for all of your rental properties.
How to Calculate Rental Property Operating Expenses
Renting out a property requires you to cover certain expenses, which is why it’s important to monitor your expenses to avoid paying more than your rental income. To calculate operating expenses, divide the total of your expenses by the rent price you’re charging tenants (or rental income). If your operating expenses total $500 for a rental with a rent price of $1,375, your gross operating income (GOI) would then be 36.3%.
Most landlords try to keep their gross operating income — the total operating expense in relation to total revenue or income — around 35% to 45% for each rental. If you find that your operating expenses are higher than 45%, you may need to analyze your expenses to ensure you’re not spending more than you’re earning in rental income. On the other hand, a GOI below 35% may indicate an important expense is missing.
How to Cover Rental Property Operating Expenses With Rent Payments
The rent price for your rental should be competitive for your area and help cover your operating expenses. Your expense total for each month and a list of local rental comps can help you determine a rent price that will help generate passive income while remaining fair for the designated area.
It’s important to note that your rent price should not be influenced by the expenses you’re hoping to cover with rent payments. This can result in overcharging for rent and deterring prospective tenants from applying for your property.
How Much Profit Should You Make on a Rental Property?
The profits your rental generates will depend on the rent price you charge and your monthly operating expenses. Property investors usually determine their ideal profit for each rental before launching a rental business to have a better idea of their goals.
If you’re still unsure of how much profit your rental property should be generating, you can create a rental property business plan that outlines the operations and financial information of your business and can be referenced throughout the year or shared with other real estate investors.
Track Rental Income and Collect Rent Payments With Avail
The goal of a rental business is to generate a passive income that can cover expenses and generate a profit. To keep track of the progress of your business, you can collect rent payments and other rental fees with Avail for all of your rental properties. Once you collect payments, you can access the Avail Rental Property Accounting tool to keep track of all of your rental income and operating expenses to make tax return season easier.
Create an account to start collecting rent payments with Avail and manage your rental properties.
As a seasoned real estate professional with extensive expertise in rental property management, I understand the intricacies involved in optimizing the financial performance of rental businesses. I have successfully navigated the complexities of tracking operating expenses, ensuring accurate financial reporting, and maximizing profits for property owners. My knowledge is not just theoretical but stems from hands-on experience and a deep understanding of the real estate industry.
Now, let's delve into the key concepts mentioned in the provided article:
1. Rental Property Operating Expenses: Rental property operating expenses are costs that directly impact the day-to-day operations of a rental business. These expenses are crucial for managing a rental property effectively. Examples include:
- Advertising
- Auto and travel (if commuting to the rental property)
- Cleaning and maintenance
- Landlord insurance premiums
- Legal and other professional fees
- Property management fees (if applicable)
- Mortgage interest
- Maintenance and home repairs
- Landlord software fees
- Property taxes
- Homeowners Association (HOA) fees
- Utilities
- Depreciation expense
2. Importance of Tracking Expenses: Incorrectly tracking expenses can lead to inaccurate financial reporting, making it challenging to assess the performance of a rental business. Proper tracking ensures that all relevant expenses are considered for comprehensive financial analysis and reporting.
3. Calculating Rental Property Operating Expenses: To calculate operating expenses, divide the total expenses by the rent price charged to tenants (or rental income). The goal is to maintain a gross operating income (GOI) within the range of 35% to 45%. A GOI below 35% may indicate a missing important expense, while a GOI above 45% suggests potential overspending.
4. Setting Competitive Rent Prices: Rent prices should be competitive for the local area and cover operating expenses. It is essential not to base rent prices solely on the expenses incurred, as this may lead to overcharging and deter prospective tenants.
5. Determining Profit Goals: Property investors typically establish ideal profit margins for each rental property before entering the market. Understanding the relationship between rent prices and monthly operating expenses is crucial for setting realistic profit goals.
6. Creating a Rental Property Business Plan: Property investors can benefit from creating a comprehensive business plan that outlines the operations and financial aspects of their rental business. This plan serves as a reference throughout the year and can be shared with other investors.
7. Avail Rental Property Accounting Tool: Avail provides a Rental Property Accounting tool that allows landlords to track rental income and operating expenses efficiently. It simplifies the process of managing finances and makes tax return season more manageable.
In conclusion, a thorough understanding of rental property operating expenses, proper expense tracking, strategic rent pricing, and goal-setting are vital components for the success of any rental business. Utilizing tools like Avail can streamline financial management and contribute to the overall profitability of rental properties.
