If you are considering purchasing an income-producing property, whether for short-term or long-term rentals, it is important to understand the expenses attached to this type of investment. While the potential income to be generated from rent received is usually the most attractive part of ownership — along with anticipated appreciation — expenses will inevitably take a huge bite out of that income. And really, the potential gross income is not as important to your bottom line as the potential net income.
Below are some of the more general expenses you can expect to find for both short-term and long-term property rentals. These lists will provide you with a framework to find out as much as 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 Rental
- Mortgage (if applicable)
- Property Taxes
- Insurance
- Property Management (if applicable)
- Utilities
- In a short-term rental, these would be the owner’s responsibility
- HOA dues (if in a HOA or condo association)
- Advertising/Booking Service (such as on VRBO)
- Garden/Lawn Maintenance/Landscaping
- Cleaning
- Toilet Paper/Paper Towels/Supply Restocking
- Local Occupancy and/or Income Taxes
- Local Permits Maintenance
Long-Term Property Rental
- Mortgage (if applicable)
- Property Taxes
- Insurance
- Property Management (if applicable)
- Utilities
- Some might be owner responsibility while others may get passed on to the tenant
- HOA dues (if in a HOA or condo association)
- Advertising the rental (when vacant)
- Garden/Lawn-mowing/Landscaping
- Local Income Taxes
- Local Permits Maintenance
Don’t forget — real vacancy rates will also take a bite out of income!
However, we haven’t yet accounted for the tax benefits of owning an income-producing property. Although you will want to form a tax strategy with your accountant, make sure he or she thoroughly understands how to use the tax code to your best interest.
One other thing to keep in mind as you measure the income and expenses of owning an investment property 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.
It is important to understand the full scope of owning an investment property before moving forward. If you are just beginning to think about purchasing a home intended for long or short-term rentals, reach out and we’d be happy to help!