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Welcome back everybody!

This week’s newsletter is going over typical expenses to plan for when investing in real estate.

Many times, when people first get started in real estate, they assume the cash flow of their investment is the rent amount minus the mortgage payment.

However, once you start owning rental properties, you begin to figure out there are more expenses than you initially thought.

This particular newsletter will discuss those expenses when it comes to single family rentals.

To begin, if the property is not purchased in cash, there will be a mortgage on the property. There are plenty of different variables when it comes to mortgages such as the loan amount, loan term and interest rate. However, that is typically the biggest expense each month that everybody knows about.

If your lender does not escrow property taxes and insurance through the mortgage payment, then you will also have to budget for those. Property taxes are usually due in December and your insurance premium is paid in full or monthly once you move forward with a quote.

Property taxes and insurance policies can vary depending on your property and location, but I usually budget 1% of the purchase price/value for the property taxes and 1% for insurance.

After Principal, Interest, Taxes, and Insurance (PITI) is paid, you should also budget for the following. I have broken these down as percentages of rent.

Vacancy: 5-10%

Vacancy is the time when the property sits empty and there is not a rent check coming in. A good range is 5-10%. The property may be occupied all year or vacant for 2 months, so this why there is a small percentage budgeted each month.

Repairs and Maintenance: 5-10%

This will depend on the age and condition of the property or if a major rehab has just been completed. With physical property, things tend to break over time, so it is important to budget for these items each month.

Capital Expenditures (CapEx): 5-10%

Homes have larger ticket items that often last several years, but do need to get replaced eventually. Examples include roofs and HVAC systems. These items can eat away at your profits so it is important to budget for them.

Property Management Fees: 5-10%

If you do not plan to manage the property yourself when it comes to leasing it up and taking tenant phone calls, then you can expect a property management fee each month. Management fees tend to be higher when you have less units being managed and lower when there are more units.

I’m not writing all of this to discourage people from investing in properties.

However, I am writing it so people become aware of what expenses to consider and budget for each month.

As a reminder:

❌ Rent check-mortgage payment=Phantom Cash Flow

✅ Rent check-mortgage payment-property taxes-insurance-vacancy %-repairs and maintenance %-capital expenditures %-property management %=Actual Cash Flow

Once you realize all the expenses you can expect when owning rental properties, then you can start using those numbers and percentages when analyzing deals. This will help you have a better idea of the actual cash flow over time.

There was a lot discussed in this week’s newsletter, so feel free to let me know if you have any questions.

I want to help others create income streams and generational wealth through real estate!