If you are considering purchasing an income-producing property, whether to be used as a short-term or long-term rental, it’s important to keep in mind that the rent (potential income) received is usually the most-attractive part of ownership — along with anticipated appreciation. However, your expenses will typically take a huge bite out of that income, so the potential gross income is not as important to your bottom line as the potential net income.
Below are some of the general expenses that accompany owning both short-term and long-term property rentals. These lists will provide you with a framework to discover everything you can about a property’s historic expenses before purchasing, so you can make sure the real income and expenses fall in line with your expectations:
Short-Term Property Rentals:
- Mortgage (if applicable)
- Property Taxes
- Insurance
- Property Management (if applicable)
- Utilities
- These are typically covered by the owner in a short-term rental
- HOA dues – if your home is located in a HOA or condo association
- Advertising/Booking Service (such as Airbnb or VRBO)
- Landscaping
- Includes garden maintenance, lawn-mowing, and tree-trimming
- Cleaning
- Paper Supplies
- Paper towels, toilet paper, etc.
- Local Occupancy/Income Taxes
- Local Permits
- General Maintenance
Long-Term Property Rentals:
- Mortgage (if applicable)
- Property Taxes
- Insurance
- Property Management (if applicable)
- Utilities
- Some utility expenses might be owner responsibility while others may get passed on to the tenant
- HOA dues – if your home is located in a HOA or condo association
- Advertising (when vacant)
- Landscaping
- Includes garden maintenance, lawn-mowing, and tree-trimming
- Local Income Taxes
- Local Permits
- Maintenance
Remember, real vacancy rates will also take a bite out of income!
Something else we haven’t accounted for here are the tax benefits of owing an income-producing property. Although you will want to form a tax strategy with your accountant, make sure he or she fully understands how to use the tax code to your best interest.
One other thing to keep in mind as you calculate potential income and expenses is that time is usually on the side of the investor. The amount received in rent usually increases per year, while expenses may not increase as rapidly, and if any mortgage is at a fixed rate, that amount won’t increase at all.
It is important to get the full financial big picture on a property before moving forward. If you are just beginning to think about an investment property, let’s discuss! There are plenty of available opportunities here in the Cle Elum area.