What expenses should I budget for a rental property?

Most rental properties spend 35 to 50 percent of their gross rent on operating expenses before the mortgage is paid. Investors who budget less than that are usually not running cheaper properties; they are leaving expenses out of the model and finding them later, at full price.

The fixed expenses

Start with the costs that arrive whether or not the property is rented: property taxes (pull the actual figure from the county or the listing, and check whether a sale triggers a reassessment), landlord insurance (typically pricier than an owner-occupant policy on the same house), HOA dues where applicable, and any landlord-paid utilities, common on multi-unit buildings where water, sewer, and trash are not separately metered.

The percentage-based expenses

Four expenses scale with rent and are budgeted as percentages: vacancy at 5 to 10 percent (even great properties turn over, and turnovers take weeks), property management at 8 to 10 percent of collected rent plus leasing fees, maintenance at 8 to 10 percent for repairs, service calls, and turnover costs, and capital expenditures at 8 to 10 percent, reserved for roofs, HVAC, water heaters, and appliances.

CapEx is the one that separates realistic budgets from optimistic ones. A $12,000 roof does not care that it was not in your spreadsheet. Reserving roughly $150 to $200 per month on a typical single-family rental means the big-ticket items are pre-funded instead of catastrophic.

A line-by-line example

For a single-family home renting at $2,000 per month: vacancy at 8 percent is $160, management at 9 percent is $180, maintenance at 8 percent is $160, CapEx at 8 percent is $160, property taxes at $2,600 per year are $217, and insurance at $1,400 per year is $117. Total: $994 per month, almost exactly 50 percent of gross rent, before any mortgage payment.

This is why the 50 percent rule exists as a sanity check: over long periods, operating expenses on a typical rental tend toward about half of gross rent. Your actual number may run lower on a newer property or higher on an older multi-unit, but if your budget says 25 percent, the budget is wrong, not the property.

The expenses investors skip

The common omissions: self-management counted as free, no CapEx reserve, the seller's expense numbers taken at face value (their insurance rate, their tax basis, and their deferred maintenance are not yours), no leasing or turnover costs, and no allowance for rent going uncollected, which is a different risk than vacancy.

When a listing advertises pro forma numbers, treat them as marketing. Rebuild the expense budget from scratch using the ranges above and the actual tax and insurance figures.

From budget to decision

Once the expense budget is built, the rest of the analysis follows: subtract expenses and vacancy from rent to get NOI, then subtract debt service to get cash flow, and check how far rent could fall before you hit break-even. Realastat's free rental property calculator applies these expense categories by default, so the conservative version of the deal is the first version you see.