If you’re a real estate investor in Oklahoma City, you know that rental properties can be a great way to generate passive income. But before you get started, it’s important to understand the expenses associated with owning a rental property.
Rental property expenses are the costs associated with owning and operating a rental property. Managing your rental property expenses can be a challenge, but it is important to do so in order to maximize your profits. By understanding the expenses associated with owning a rental property and managing them effectively, you can increase your chances of success as a real estate investor in Oklahoma City.
Common Rental Property Expenses For OKC Investors
OKC investors need to understand the common rental expenses associated with rental property for better planning the budget, and maximizing returns, to make informed investment decisions.
Mortgage Interest
This is the most considerable expense for most rental property investors. This is the cost of borrowing money to purchase the property. The amount of interest you pay will depend on the size of your mortgage, the interest rate, and the loan term length.
Marketing and Advertising
Marketing and advertising fees include professional photography, online listings, signage, and promotional materials to attract potential tenants and maintain a low vacancy rate. Allocating your budget to marketing ensures that your rental property remains visible to potential tenants.
Legal and Professional Fees
You may need to pay legal and accounting fees for things like drafting leases, filing taxes, and resolving tenant disputes. While it’s possible to handle some tasks independently, seeking professional advice when necessary can help you avoid costly mistakes and ensure compliance with local laws and regulations.
Property Management Fees
Property management fees are part of the expenses associated with owning rental property. Depending on the services provided, it can include administrative and recurring costs. These fees cover tenant screening costs, rent collection, property maintenance coordination, and handling tenant inquiries. While hiring a property management company reduces some responsibilities, it’s important to account for these costs when evaluating the overall profitability of your rental property.
Property Taxes and Insurance
Property taxes and insurance are recurring expenses that every OKC rental property owner must pay annually based on the property’s value. It is important to research the tax rates where your rental property is located. Insurance coverage, including property and liability insurance, protects you from potential damages and lawsuits. Get to know more about the landlords insurance and homeowners insurance.
Vacancy and Rental Losses
When your property is vacant, you’re not generating rental income yet still have ongoing expenses to cover. It’s crucial to budget for potential vacancies and plan accordingly. Maintaining a financial buffer and implementing effective tenant retention strategies can minimize the impact of vacancies on your overall profitability. Get to know about the effective ways to minimize the rental vacancy rates.
HOA and Condo Fees
If your rental property is part of a homeowner or condominium association, you need to include the associated fees. These fees contribute to the maintenance and management of common areas and amenities. It’s important to include these fees in your budgeting process to accurately assess your rental property’s profitability.
Legal and Professional Fees
These expenses include attorney fees for lease drafting or eviction proceedings, accounting fees for bookkeeping and tax preparation, and fees for professional consultations. While it’s possible to handle some tasks independently, seeking professional advice when necessary can help you avoid costly mistakes and ensure compliance with local laws and regulations.
Utilities and Service Charges
As a landlord, you may be responsible for certain utilities and service charges, depending on the terms of your lease agreements. Common utilities include water, electricity, gas, and waste management. It’s essential to clearly outline in the lease agreement which utilities the tenant is responsible for and which you, as the landlord, will cover. Service charges may also include pest control, landscaping, or pool maintenance.
Maintenance and Repairs
You’ll need to keep your rental property in good condition for tenants. This includes the cost of repairing and maintaining your property, such as fixing broken appliances, repairing leaks, and painting.
- Emergency maintenance is the work carried out immediately to overcome the problem occurrence. It is uncertain and can be costly. For example, if a pipe bursts and floods the property, emergency maintenance would be needed to fix the pipe and stop the flooding.
- Preventative maintenance is the work done to keep a property in good condition to prevent problems. It is mainly planned and helps to save money in the long run. For example, changing the oil in your car is a preventive maintenance task.
- Seasonal maintenance is the work that is done to prepare your rental property ready for a particular season. It is usually done once or twice a year. For example, winterizing your sprinkler system is a seasonal maintenance task. Learn about the best upgrades for rental property to minimize maintenance & repair costs.
Capital Expenditures
Capital expenditures made in the rental property improve its value or extend its useful life. It includes roof replacements, HVAC system upgrades, or major renovations. Always consider the long-term benefits and investment return from capital expenditure.
Miscellaneous Expenses
There may be other miscellaneous costs associated with rental property. These can include homeowner’s association fines, unforeseen legal fees, permits, and licenses, or expenses related to tenant turnover.
How to Track Rental Property Expenses
As a landlord, it’s crucial to track and manage the expenses of your rental property business effectively to ensure financial health. Here are some tips on how to track rental property expenses:
- Maintain a profit and loss statement for each rental property with income and expenses.
- Use a rental property spreadsheet template to organize income and expense data from each real estate investment.
- Use a software program like DoorLoop, AppFolio, or Rentec Direct to streamline and optimize rental property management and accounting.
- Keep receipts, invoices, and bank statements as proof of deductions in case of an IRS audit.
- Categorize your expenses, such as mortgage interest, property tax, operating expenses, depreciation, and repairs, to ensure you don’t miss any deductions.
- Use online expense tracking tools, such as TurboTenant or Stessa, to simplify your accounting and accurately track income and expenses.
- Stay organized and up-to-date with your bookkeeping to reduce the risk of getting audited and to track your profitability from one month to the next.
Note: Try the rental property cash flow calculator to ensure financial health.
Tips for Managing Rental Property Expenses
Management of rental property expenses defines the successful landlord. Here are the tips to help you manage your expenses for rental property:
1. Estimate and Budget for Rental Property Expenses
Estimating rental property expenses is important in deciding whether an investment property is viable before buying. You can use the 1% rule, which tells all property owners to budget a minimum of $1.00 per square foot of space annually. However, estimating expenses for investment properties involves many variables that landlords can easily miss.
2. Track Rental Property Expenses and Income
An effective system to track rental property income and expenses help with filing taxes each year, an IRS audit, ensuring you submit the right amount of deductions, and understanding the actual value and return on your investments.
3. Regulate Tenant Selection
Doing complete background checks on potential tenants can save you thousands of dollars. Some tenants are fond of trashing their rented apartments and losing the security deposit. A simple call to a tenant’s previous landlord may save you thousands of dollars.
4. Plan for Future Expenses
Regular property maintenance is essential, but it doesn’t come cheap. Sometimes, maintenance may cost you thousands of dollars, which eats deep into your potential rental income. By planning for future expenses, you can avoid costly mistakes.
5. Use Accounting Software
Accounting software can help you manage your rental property finances more efficiently. AppFolio, Rentec Direct, Buildium, and Property Matrix are some of the best accounting software for rental properties.
6. Take Advantage of Tax Deductions
You can deduct several expenses from your taxes to save money and improve your overall operation. These deductible expenses relate to several business-related activities, including buying, operating, and maintaining the rental property.
[Also Read: Top Tax Benefits of Owning Rental Property]
7. Hire a Qualified Property Manager
If you do not have the time or expertise to manage your rental property yourself, hiring a good property manager can help you to save time and money by handling the day-to-day operations of your rental property.
Also Read: Learn the benefits and drawbacks of hiring a property management company.
Conclusion:
Owning rental property can provide a steady source of income while building equity in the property as it appreciates over time. You got to understand that several tax benefits are gained from owning rental property. It’s important to keep detailed, accurate records and receipts for rental property deductions to prove the expenses you claimed in case you’re audited by the Internal Revenue Service (IRS).
If you are looking for a reliable and experienced property management company in Oklahoma, contact us today! We are experienced property managers committed to providing our clients with the best possible service. We take your rental properties as an investment and will work hard to protect your investment and maximize your return.
FAQs on Rental Property Expenses
Are property management fees tax-deductible?
Yes, property management fees paid to professional management companies are generally tax-deductible as ordinary business expenses. Keep accurate records of these fees to support your tax deductions.
What are some common mistakes to avoid when budgeting for rental property expenses?
Common mistakes to avoid when budgeting for rental property expenses include:
Underestimating maintenance and repair costs.
Neglecting to account for vacancies and rental losses.
Failing to consider legal and professional fees.
Overlooking the impact of financing costs.
How can I estimate rental property expenses before purchasing a property?
Before purchasing a rental property, research the local market to understand typical rental rates, property taxes, and utility costs, or consult with property management professionals to gain valuable insights.
