One reader of my book, How to Buy Your First Rental Property and Beyond, recently asked an excellent question that went something like this,”How do I determine the expenses of a property. Do I just guess?”

In the book, I do discuss the usual and expected expenses that a potential rental property owner may incur in operating the property. I also talk about how to estimate many of them with some degree of accuracy. However, I realize that estimating expenses is usually much more accurate for an experienced rental property owner, than for someone who has never operated a rental property. With that said, I’d like to offer some additional suggestions that I may have not emphasized in the book, but hopefully readers of this blog can take away as good landlording education:

1. Estimating expenses is somewhat of an art that you can make into a science with experience.
2. Accurately estimating utilities like gas, electric and water/sewer can be done by contacting the utility companies and/or asking the current owner for the past year’s utility bills.
3. Call the township to verify the property taxes, landlord licence and inspection fees, etc. Also, depending on the time of year, you can try to find out what the current year taxes will be.
4. Talk with at least one or two mortgage lenders to find out what the rate and terms would be on the specific property that you are looking at. You want to be sure that the rates are close to what you need so that your income, minus your expenses still leaves enough money to pay the mortgage.
5. For things like advertising, insurance, legal and accounting fees, you can call these vendors and explain what services you may be needing and asking them what they charge.
6. For things like maintenance, improvement and some of the other variable expenses, you need to evaluate the current shape of the property. You will need to figure what should be done now and what can be deferred until later. If you are inexperienced or otherwise unsure, this is where a good certified home inspector may come in handy, and could save you many times the initial expense of their service. However, I also discuss in the book, a very rough estimation “rule” you can follow when you are initially evaluating the property. This is where the “art” of evaluation comes in, because it really varies per property. Experienced owners tend to be much better at knowing what they will have to do when they buy a property and what it should cost. Again, you could also use a licensed home inspector who can help you estimate the cost of any defects or repairs that they uncover.

The biggest caution that I have is that you don’t just take the Seller’s or Agent’s “word” on what the expenses are for the property in question. Do your homework. You’re going to have to spend some time, but the more you do this exercise on potential rental properties, the better you’ll get and also the better purchase you’ll make when you discover a property that works! I my book, I have included a detailed “Cash Flow Worksheet.” This worksheet is designed to help guide you through the evaluation process and help you evaluate the income and expenses of a specific property to see if it’s a potential “winner” or “loser”.

Warmest Regards,

Steven A. Boorstein
Author