Single family real estate investors know that you have to budget for operating expenses as you evaluate a deal and estimate how well a rental property will cash flow. A good guideline as you develop your proforma projections is that operating expenses tend to be in the range of 35-50 percent of the gross operating income (GOI)
Expenses vary based on factors like property age and location, but generally include:
- Property taxes
- Property management fees
- HOA fees
- Landlord-paid utilities
- Vacancy expense
An Often Overlooked Expense
The goal, of course, is for your property to be rented continuously, with no gaps. The reality, however, is that there tend to be weeks (and potentially months) each year when your property is vacant. For example, you may have a tenant who breaks their lease and vacates abruptly. While some of the vacancy may be covered by rent you collected in advance, you can still be left carrying the property if it takes time to find a new tenant and get them moved in.
Even if a tenant gives ample notice and you are able to line up a new renter in advance, you may end up with a short vacancy for the time it takes to make the unit ready for the new renter, or if the new tenant can’t move into your property immediately after the departing tenant moves out. You may also find yourself in a situation from time to time where you have to make significant repairs or updates to the property that delay occupancy by a new tenant.
Consequently, it’s important that you think of vacancy like you would any other expense and budget for it accordingly. Initially it’s best to estimate conservatively to ensure you’re covered. Over time, you’ll get to know the neighborhood and the area rental market, and will be able to zero in on an optimal figure to set aside.