Becoming a great landlord begins long before signing a lease. It starts with owning a profitable rental property. And the sad truth is that most properties actually make terrible rental properties, because they don’t provide any cash flow. (Cash flow is the extra monthly income you get to keep after paying the bills.)
As you think about buying a property, it’s vital that you run all the numbers to ensure the property will actually cash flow.
The basic definition of cash flow is simple: Total Income – Total Expenses = Cash Flow
However, as with most things in life, the devil is in the details. How much can you rent a house for? (We’ll talk about that in just a moment.) And how much will you spend each month just to hold onto the property?
For example, if you are renting a house and don’t require tenants to mow the lawn themselves, you may pay between $30 and $80 per month for lawnmowing services.
While each property incurs different costs, some common line item expenses to consider may include:
- -Mortgage payments
- -Insurance and taxes, if you pay these out-of-pocket
- -Pest control
- -Lawn maintenance
- -Property manager fees
- -HOA fees
- -Utilities that you pay, such as trash, sewer, and water, if applicable
- -Local licensing and certification fees
- -Capital expenditure repair reserve for roof, appliances, and other major systems—between 5% and 10% of the rent
- -Marketing fees
- -Cleaning fees
- -Vacancy reserve—between 3% and 5% of the rent
- -LLC costs, if you’re using an LLC for your rental property
- -Accounting and bookkeeping fees