In my ROI formula, I take out 40% initially. Those funds go toward a wide variety of expenses, including vacancy, repairs, and expenses. In the markets where I purchase my rental properties, I figure in a 5% vacancy rate. This gives my team a minimal amount of time, two to three weeks, to account for tenant turnover.
You should also be prepared to pay a management fee. Many new investors try to dodge the bullet and self-manage their properties, but paying for a dependable, on-site management team is worth every penny! You can expect to pay roughly 10% of your rental income on property management. Typically, the property manager subtracts their fee directly from the monthly rent.
Insurance is another factor to consider when investing in real estate. You’ll want to set aside around $500 per year for a single-family home. This covers liability, as well as the building, should anything unfortunate happen.
Annual property taxes are another cost you'll want to account for. Where we invest, the property taxes are just a few hundred dollars per year—$500 at most. I don’t purchase properties in high tax states like New Jersey, New, York, California, or Texas. You can expect to pay slightly more if your property is a duplex or has a higher square footage, buy we try to keep it as low as possible! You can visit the county assessor’s office where your property is located to determine an estimate of taxes.
Because of the extensive manner in which we renovate our properties, we have very few repairs to worry about. I don’t anticipate major repairs. I might have to replace a furnace in ten years, or the roof in 20 years, but I’ll pay for it when the time comes as opposed to setting aside extra money every month.
I don’t buy condos with HOA fees. I don’t want to be nickeled-and-dimed. I don’t work with property management companies that charge tons of petty fees. Remember, every expense comes out of your bottom line.