Every investor, landlord, or property manager should know the costs associated with owning a rental property. Everything from the cap rate, return on investment, to your cash flow relies heavily on how you effectively handle your costs. One concept you should care about is carrying costs. Most first-time investors and property managers fail to take carrying costs into account. ProWay Property Management is here to give a guide on carrying costs for your rental property management needs.
WHAT IS IT?
These are recurring costs that the owner is responsible for during the duration of owning the property. When first purchasing an investment property, most investors focus on the acquisition and rehab fees, completely forgetting the other carrying costs included. The fees that are easily forgotten are costs such as utilities, maintenance and management costs. These costs need to be factored in, since these costs can bear a heavy weight on your overall budget, ROI, cash flow, and your cap rate. They also determine how much rent you’ll need to charge for your rental property.
EXAMPLES OF CARRYING COSTS
Rental Property Insurance
This insurance protects property managers against certain liabilities caused by their tenants. This also includes damage caused by normal wear and tear or from weather damage. There are several factors that can affect rental property insurance rates, such as: the number of rental units, overall condition of the property, location and replacement costs.
Having a rental property in a location that is most likely to experience natural disasters, such as earthquakes, can increase the rate of the insurance policy. The required presence of certain safety amenities such as fire extinguishers, security cameras, and burglar alarms have an effect as well.
Vacant Home Insurance
As the name suggests, this covers rental properties that have been left unoccupied for long periods of time. Any property that has been left vacant is open to burglaries, vandals, and even weather damage, such as frozen pipes bursting or wildfires.
Some insurance companies distinguish what exactly vacant and unoccupied means. A property that is considered unoccupied means that it hasn’t had a tenant for 30 days or more, but personal belongings can still be found. Vacant properties on the other hand are those that have been unoccupied for 30 consecutive days or more with a few or no belongings found.
This insurance cost is affected by vacancy rates, presence (or absence) of security systems, condition of the property, replacement costs, property oversight, and multi-policy discounts.
Homeowners’ Association (HOA) fees
Some neighborhoods, or subdivisions have Homeowners Association fees. These are additional fees which will add to your monthly expenses.
HOA fees cover communal expenses, such as landscaping, trash and recycling pickups, utilities, security and reserve requirements (cash collected for future repairs and maintenance).
Some associations charge fines and penalties to homeowners who do not abide with their regulations and monthly (or yearly) assessments. These fees can range in price, depending on the size of the rental property, location and certain amenities included.
In almost every aspect of real estate, property taxes play a part. These are levied by the local or state government on properties within their borders. The tax itself is calculated based on the value of the property which is computed using the assessed property value or through the mill levy system.
Once the evaluation has been done, the property owner receives the assessment along with the tax bill. With careful understanding of property taxes, a savvy investor or property manager can highly benefit from rental tax deductions.
Utilities are always part of any holding cost involved in property management. The costs can be determined by the location of the rental property, usage habits of tenants and square footage. Some common utilities to take note of are:
The main purpose of managing carrying costs is to avoid negative cash flow. By being aware of your carrying costs from the onset, you can plan effectively and minimize any unwanted expenses. As a landlord, knowing your carrying costs will help you determine how much rent to charge. It will also help decide what, if any, items will be covered in the rent, and what the tenants will be responsible for.
Knowing, and understanding all your carrying costs will guide you to receiving a good return on your rental property. With the weight of responsibility involved in property management, it can be overwhelming, for both first-time landlords, as well as seasoned investors. Our team of professionals at ProWay Property Management can walk you through every property management process involved in a smooth and seamless manner. To learn more about our services, contact us at (734) 744 – 5080 or send us an email at email@example.com.