I have so many friends talking about "I can pay all of the mortgage with rent, this house cash flows" and uhhh not really.
There are so many costs associated with a rental. Let me break it down for you:
Property Tax
Property tax takes into account of both land and building, so if you happen to have a big lot, be prepared.
When shopping for a property, don't just use its property tax history directly. When you become the new owner, the appraised value might change drastically, or as a landlord, you might not be able to get owner-occupant property tax rate discount, which might be a big hit.
Insurance
Homeowner's insurance, hazard insurance, property coverage. It has many names but they usually refers to the same thing. It covers the structure of the property. The price depends on the location of the house, but usually $100 per month should cover it.
There's also flood insurance if your house is in a FEMA flood zone or other types of insurance that's specific to your region that your lender might require.
You should also consider umbrella insurance as an option that covers your liability. If your renter is injured and sue you for too much, umbrella insurance can save you from bankrupt.
HOA
This obviously applies if you have a HOA, but do note that HOA price can and will go up every year ;)
Vacancy
If there'a 5% chance that your house is vacant, or on average 5% of the time your isn't rented out, you should count this 5% as an expense.
You might ask "but I'm not paying for anything, why is this an expense?" This is because when budgeting, you use 100% of the rent as income, but you are really missing that 5%.
Maintenance
Self-explanatory and should be budgeted for around 5-10% depending on how good/new your property is. However, don't set the number too low, things get broken faster than you think.
CapEx
Capital Expenditure, commonly called as CapEx. It's referring to the large items that costs a lot like replacing HVAC, roof, etc. They have a separate category because they will destroy your budget if you don't budget for them.
Good thing is they you should only worry about these replacements every 5 to 10 years, so if we leave out 10% of monthly rent, in the long run we should have saved enough for them. Well, hopefully.
Utilities
Depending on the area, landlord might need to cover for garbage, water, electricity even, or lawn care, or none. Talk to your property manager and they will know.
Does my house cash flows?
We have talked about so many different costs above and we haven't even touched mortgage payments. If your properties are still performing after considering all these expenses, congratulations! Your house does cash flow and that's actually really hard in the current market. Good job!
