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Rental Property ROI Calculator

Thu, 29 Sep 2022 08:36:07 -0500

Common Rental Property Expenses

Estimating and budgeting for expenses is crucial. The best way to do that is with a profit and loss statement, a report listing the income, expenses and profit for the rental property. It ensures that you know your net profits each month and each year so that you see a return on investment. The good news is that many rental property expenses are tax-deductible, so be sure to keep track of what you spend throughout the year.

Rental property expenses are typically at least 35 percent of the home's gross operating income, but they can vary. To get a good idea of how much you're likely to spend, talk to other property owners in your area and do some research. Here are 11 common rental property expenses you need to understand.

1. Repairs and maintenance

Chances are something in the rental home will break during the year and you'll have to repair it. Since most repairs seem to come out of nowhere, it's sometimes tough to budget for everything. But performing regular maintenance, such as checking the HVAC system seasonally and keeping up the landscaping, will make sure the home remains in excellent condition and can save you money on future repairs.

Some experts suggest setting aside at least one percent of the property's value each year for repairs and maintenance. But the age and condition of the home often factor into the costs of repairs and maintenance. Property owners are typically responsible for a home's repairs, but if you're expecting tenants to handle some of the maintenance, such as yard work, put it in the lease agreement.

2. Insurance

Insurance is another rental property expense you can expect to pay. Landlord policies should include liability, personal property and dwelling coverage. These policies usually cost about 25 percent more than a typical homeowners insurance policy, which averages $2,285 a year, according to Insurance.com. If you have a mortgage, insurance is often included in your monthly loan payment.

Along with the typical liability, personal property and dwelling coverage, you might also need flood, earthquake or other additional insurance, depending on where the home is. Contact your insurance company to determine what type of coverage you need and how much it will cost.

3. Property taxes

The cost of property taxes varies by state and even community. On average, American households pay $2,471 in property taxes every year, according to the U.S. Census Bureau. But, taxes are as high as $8,000 in some areas. The best way to find out exactly how much your property taxes will be is to contact your local county assessor. This office calculates tax amounts based on the current real estate fair market value. You'll usually pay your property taxes with your mortgage payment if you have a home loan.

4. Marketing and advertising

To find qualified tenants, you need to advertise the property. Placing an ad in your local newspaper or running an ad on Facebook is another rental property expense. Marketing and advertising expenses might also include taking professional photos of the home.

5. Property management

Property managers handle the day-to-day of the rental property, including advertising the home, taking tenant applications, screening potential renters, collecting rent and handling repairs and complaints. They're also experienced in drawing up leases and are knowledgeable about local landlord-tenant laws. Hiring a property manager will cost about 10 percent of the monthly rent, but it will save you the time and headache of dealing with the rental.

6. Tenant Application Fees

Part of selecting the right tenant for your rental involves screening applicants and running credit and criminal background checks. If you're doing this yourself, a credit check through one of the credit bureaus, including Equifax, Experian or TransUnion, will cost about $35 each. Criminal background checks typically run about $35, as well. If you hire a property manager, they'll handle the screening as part of their monthly fee.

7. Homeowners association fees

If your rental home is in a homeowners association, expect to pay a monthly HOA fee. These costs are typically $200 to $300 a month but can run up to about $1,000. It all depends on the HOA's amenities, such as a pool or fitness center, and what services they provide, such as yard work or other maintenance. Contact the local HOA to find out how much you'll pay.

8. Licenses and permits

Laws governing rental properties vary by state and municipality. In some places, you may need a license or permit to operate a rental property. Consult with a local attorney or do your homework to find out what's required in your area.

9. Legal and other professional fees

Owning a rental property is a complicated experience, especially when you're just starting out. There are complex landlord-tenant laws to understand, a few extra forms on your tax return to fill out and much-needed financial and legal advice. So, you might need to hire a professional, which is another rental property expense. It's a worthwhile cost, though, since these services will ensure you're following the law and that your finances are in check.

Hiring an attorney is a great idea to understand local legal requirements for owning rental property. These laws tend to include many caveats that are difficult to understand on your own. A certified public accountant (CPA) will help you file your taxes and offer advice about whether you need to form a company or continue operating the rental home as an individual.

10. Utilities

Tenants are usually responsible for paying their own utilities. But, you might consider paying the water bill or including the cost of Wi-Fi in the rent as a perk. These costs average a couple of hundred dollars a month. Also, keep in mind that you'll need to pay all utilities in between renters when the home is vacant.

11. Vacancies

This isn't a rental property expense in the traditional sense because you're not actually paying for something. But, a vacancy is money out of your pocket. If the property sits empty for a month or two, that could potentially cost you thousands of dollars. To minimize the chance of a vacancy, add a clause to your lease agreement that asks renters to notify you at least a month before the lease ends when they're not renewing. This will give you time to find a new tenant to move in immediately.

Home Budget Calculator

Thu, 29 Sep 2022 04:55:12 -0500

Managing a monthly budget can be difficult and frustrating. One of the most important aspects of controlling the budget is to determine where money is going. This home budget calculator helps you do just that. By entering income and monthly expenditures, view how much money is left to save and how much money is being spent.

Debt-to-income Calculator

Wed, 28 Sep 2022 11:35:56 -0500

Next Steps

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Build a budget.

Preparing for big life events is essential to maintaining a healthy financial profile. A clear and effective budget can help.

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What is a debt-to-income ratio?

A debt-to-income, or DTI, ratio is derived by dividing your monthly debt payments by your monthly gross income. The ratio is expressed as a percentage, and lenders use it to determine how well you manage monthly debts -- and if you can afford to repay a loan.

Generally, lenders view consumers with higher DTI ratios as riskier borrowers because they might run into trouble repaying their loan in case of financial hardship.

To calculate your debt-to-income ratio, add up all of your monthly debts – rent or mortgage payments, student loans, personal loans, auto loans, credit card payments, child support, alimony, etc. – and divide the sum by your monthly income. For example, if your monthly debt equals $2,500 and your gross monthly income is $7,000, your DTI ratio is about 36 percent. (2,500/7,000=0.357).

What factors make up a DTI ratio?

Here's a simple three-step formula for calculating your DTI ratio.

Add up all of your monthly debts. These payments may include: monthly mortgage or rent payment, minimum credit card payments auto, student or personal loan payments, monthly alimony or child support payments or any other debt payments that show on your credit report
Divide the sum of your monthly debts by your monthly gross income (your take-home pay before taxes and other monthly deductions).
Convert the figure into a percentage and that is your DTI ratio.

Keep in mind that other monthly bills and financial obligations -- utilities, groceries, insurance premiums, healthcare expenses, daycare, etc. -- are not part of this calculation. Your lender isn't going to factor these budget items into their decision on how much money to lend you. Keep in mind that just because you qualify for a $300,000 mortgage, that doesn't mean you can actually afford the monthly payment that comes with it when considering your entire budget.

What is an ideal debt-to-income ratio?

Lenders typically say the ideal front-end ratio should be no more than 28 percent, and the back-end ratio, including all expenses, should be 36 percent or lower. In reality, depending on your credit score, savings, assets and down payment, lenders may accept higher ratios, depending on the type of loan you're applying for.

For conventional loans backed by Fannie Mae and Freddie Mac, lenders now accept a DTI ratio as high as 50 percent. That means half of your monthly income is going toward housing expenses and recurring monthly debt obligations.

Does my debt-to-income ratio impact my credit?

Credit bureaus don't look at your income when they score your credit so your DTI ratio has little bearing on your actual score. But borrowers with a high DTI ratio may have a high credit utilization ratio -- and that accounts for 30 percent of your credit score.

Credit utilization ratio is the outstanding balance on your credit accounts in relation to your maximum credit limit. If you have a credit card with a $2,000 limit and a balance of $1,000, your credit utilization ratio is 50 percent. Ideally, you want to keep that your credit utilization ratio below 30 percent when applying for a mortgage.

Lowering your credit utilization ratio will not only help boost your credit score, but lower your DTI ratio because you're paying down more debt.

How to lower your debt-to-income ratio

To get your DTI ratio under better control, focus on paying down debt with these four tips.

Track your spending by creating a budget, and reduce unnecessary purchases to put more money toward paying down your debt. Make sure to include all of your expenses, no matter how big or small, so you can allocate extra dollars toward paying down your debt.
Map out a plan to pay down your debts. Two popular ways for tackling debt include the snowball or avalanche methods. The snowball method involves paying down your small credit balance first while making minimum payments on others. Once the smallest balance is paid off, you move to the next smallest and so forth. On the other hand, the avalanche method, also called the ladder method, involves tackling accounts based on higher interest rates. Once you pay down a balance that has a higher-interest rate, you move on the next account with the second-highest rate and so on. No matter what way you choose, the key is to stick to your plan. Rezzy's debt payoff calculator can help.
Make your debt more affordable. If you have high-interest credit cards, look at ways to lower your rates. To start, call your credit card company to see if it can lower your interest rate. You might have more success going this route if your account is in good standing and you regularly pay your bills on time. In some cases, you may realize it's better to consolidate your credit card debt by transferring high-interest balances to an existing or new card that has a lower rate. Taking out a personal loan is another way you could consolidate high-interest debt into a loan with a lower interest rate and one monthly payment to the same company.
Avoid taking on more debt. Don't make large purchases on your credit cards or take on new loans for major purchases. This is especially important before and during a home purchase. Not only will taking on new loans drive up your DTI ratio, it can hurt your credit score. Likewise, too many credit inquiries also can lower your score. Stay laser- focused on paying down debt without adding to the problem.