A lot of real estate investors are losing money without even realizing it.
They buy property based on “gut instinct” or emotion without taking the time to accurately forecast property expenses. At the end of the day, they pay more taxes on their rental income than they have to.
Today’s tax laws are extremely friendly to rental real estate investors. In fact, investment real estate provides unique tax benefits that other assets don’t offer. But before you can reap the rewards of those benefits, you need to know what they are.
In this article we’ll cover rental property expenses that investors need to account for. You can also refer to the checklist at the end of this post for a simple guide of everything you should be keeping track of.
Estimating Expenses Before You Buy
It’s easy to estimate rental income. Look at market comparables and performance, get a basic sense for supply and demand in the area, and you’ve got a pretty accurate idea of how much rent you’ll receive each month.
But estimating expenses is much more difficult, simply because there are a lot more expected – and unexpected – variables.
Many investors use what’s called the 50% rule as a starting point to estimate the expenses on a deal they’re analyzing, but let’s first begin by looking at the three steps that will help you more accurately estimate your rental property expenses before you buy.
Step #1 – Talk to property managers in the market
Property managers are an excellent source for accurate expense information that you won’t find anywhere else. Contact several and let them know you’re thinking about buying an investment property. Let them know you’re considering hiring a manager and ask them what they think expenses on the rental property should run.
Step #2 – Speak with fellow real estate investors
People that you’ve met in your local real estate investment club are another excellent source for estimating rental property expenses. Active investors know that networking is the name of the game. If they help you out, they know you’ll repay the favor down the road.