What are operating expenses in rental property?
Not sure which costs associated with the investment property should be classified as operating expenses? This guide will give you all the answers.
A positive cash flow is your no. 1 goal when you own a rental property. Although you get appreciation and tax breaks as fantastic benefits, the most crucial objective is to make a monthly profit out of your rental property.
To achieve positive cash flow, you need to be aware of your income and your expenses. And, although it may sound easy to know your operating expenses, many landlords get confused by hidden costs. This guide will explain everything rental property owners need to know about operating expenses.
What are operating expenses?
First, let’s give operating expenses a definition. Operating expenses are those costs associated with things that affect the day-to-day operation of the investment (rental property in your case). They are the ongoing costs associated with the maintenance and keeping a rental property investment in service so that it keeps the revenue stream flowing.
Here’s a brief overview of the costs that you can consider to be operating expenses:
Marketing and advertising
Property taxes
Insurance
Utilities
Rubbish collection
Management
Maintenance and repairs
Pest control
Snow removal
Landscaping or pool care
Accounting
Legal services
It is also important to know what costs you cannot consider operating expenses. Here are a few examples:
Debt / mortgage
Investor income taxes
Depreciation
Capital improvements
Refinancing costs
Home improvements
How to calculate your operating expenses ratio?
To calculate your operating expenses ratio (OER), you need to do a little research and determine the closest possible numbers for each of your operating costs. This will give you a good idea of the total cost. Next, divide your property’s operating expenses by the gross operating income. This will give you an approximate of your OER.
Why does knowing your operating expenses matter?
You may wonder why it is so important to be highly aware of these operating expenses. Well, there are two good reasons for that. Operating expenses can be a substantial financial chunk of what you must pay to own your rental property and gain profit from it. So, these operating expenses ultimately play a significant role in your real estate investment because they directly impact your net income and the annual cash flow. So, knowing exactly what your operating expenses are is essential to decide if you should invest in a rental property or not and whether it is still profitable or you should sell it.
