NUTS & BOLTS
ACCOUNTING
What's it Going to Cost?
UNDERSTAND THE COSTS INVOLVED IN MAINTAINING A RENTAL PROPERTY WHEN EVALUATING WHETHER TO MAKE THAT DEAL.
by Carter Froelich, CPA
I
n recent articles, I have discussed the need for “finan- cial literacy” and an understanding of the terms, con- cepts and fundamentals of cash-flow analysis. We have looked at estimating effective gross income. Now we turn to operat- ing expenses. These are the expenses that are paid by a real estate investor to keep the property generating revenues on a monthly basis. Operating expenses do not include mortgage payments, depreciation or capital improvements. The accompanying table illustrates some of the typical operating expense categories for a standard residential rental property. These account categories were taken from the default operating expense settings from The Property Ledger a cloud-based real estate investment software developed ex- clusively to assist the average real estate investor in analyzing real estate investment opportunities. The most common operating expenses as they relate to residential real estate include: PROPERTY TAXES Represents the property taxes that you as a property owner will pay on an annual basis related to state, county and mu- nicipal government as well as school district operations. You may obtain a property’s current property tax bill by going online to the respective county treasurer’s or county assessor’s website and searching by parcel number, owner or address. Remember, when you purchase a property at a price high- er than that paid by the previous owner, your property tax payment will increase from that shown on the current tax bill. Make sure you take this into account when calculating your prospective investment’s property tax payment or you may underestimate this expense. In my mind, it is always better to be conservative (meaning selecting a higher number) when estimating operating expenses. PROPERTY INSURANCE Property insurance is necessary to protect both you and your lender from loss in case of fire, flood, earthquake or oth-
THE PROPERTYLEDGER
Default Expense Categories (1)
GENERAL EXPENSES
OTHER EXPENSES
TAXES Other Payroll
Accounting Advertising Auto and Travel Cleaning Commissions HOA Dues Fees Insurance Landscaping Legal Maintenance Management Fees Payroll Professional Fees Supplies
Property Personal
UTILITIES Electric Gas Other Telephone
Trash Water
(1) Default settings. Other categories may be added as necessary.
120 | think realty magazine | may :: june 2016
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