Zillow real estate investment writer and long-term investor Leonard Baron, MBA, is answering questions from MintLife readers.
If you have a question about investment properties, cash flows, insurance, mortgage financing, homeowners associations, renting versus owning, foreclosures and more, drop Leonard an email.
Estimating Rental Property Expenses
I have used your book to purchase three rental properties and so far I’ve been successful, but I’ve only been at it two years.
I am now reading about the “50% rule” and was wondering what your thoughts were on it?
The rule of thumb I’ve been told is that over time, 50 percent of your real estate investment income will be spent on expenses, excluding your mortgage.
Answer: Expenses can range from 35 to 55 percent of your investment income depending on the type and age of the property, HOA fees and other costs you may incur.
It’s best to be conservative, but you should try to aim as close to this range as possible.
To estimate your rental property expenses, you should consider insurance, HOA fees, property taxes, utilities and maintenance.
You can talk to your insurance agent to get an exact quote. Look at your HOA demand statement to determine HOA fees.
The property tax amount should be recorded by the county (if you’re in California, it’s based on your purchase price).
You should also consider any utilities or other expenses you’ll pay under your lease such as trash pick-up, pest control, service contracts and home warranties.
The toughest expense to predict is general maintenance and repairs. If you need landscaping, you can get bids for that service.
I also provided some guidance on Zillow Blog for estimating maintenance and miscellaneous expenses.
Best of luck!
Holding Land for Appreciation
Mari of Bakersfield, CA asks:
I’m a new investor and have a chance to buy land in a semi-rural area. It’s pretty good land on the edge of town.
I would hold the property for a long time and then develop it.
What do you think of land investments? What kinds of returns can I expect?
Answer: Land is by far one of the riskiest real estate investments a person can make. Until you build on it, land does not yield any annual cash flow.
Rather, it takes money out of your bank account for taxes, insurance, upkeep and other expenses.
Investments pay cash flow.
With land, you’re betting it will go up in value to make up for the money you spend to cover the annual negative cash flow. But, chances are the value won’t go up enough.
If you want to own real estate, buy properties that are in decent condition in your area, where quality tenants with good credit reside.
Most important, focus on properties with rental income coming in that is more than your expenses – and then some!
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow or Mint.com.
Leonard Baron, MBA, CPA, is Zillow’s real estate investment writer, a San Diego University lecturer and real estate due diligence expert. As America’s Real Estate Professor®, his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions.