If you are looking at buying a rental property or holiday home in the US, you need to take account of running costs in the investment equation.
Running costs – including the mortgage – can make or break the feasibility of the buying a property, but often overseas property buyers gloss over the figures or hope for the best.
The problem is sticking your head in the sand and ignoring property costs could land you with an expensive surprise.
Running costs will vary between properties – depending on several factors, like if they are apartments or houses, their age and size.
Running costs checklist
To help work out the costs, here’s a list of common running costs and an estimate of how much to expect to pay each year.
Experienced investors will have a percentage to property value figure for running expenses in their heads when they view a property – the range should fall between 35% and 80% of the gross operating income.
Check any figure falling below 35% as it’s likely to be too low, while any amount over 80% leaves no room for manoeuvre for inflation, emergencies or a rise in mortgage interest rates.
Gross operating income is all the money generated by the property during the year as rent.
Working out how much
Here’s an example of working out the running costs to income ratio for a home collecting $1,500 a month with expenses of $600 a month
Divide the expenses by the rent (600/1500), which comes to 40%. This is a reasonable percentage for a standard house or apartment.
It’s a good idea to ask a couple of neighbours for hints about running costs.
Every property needs some maintenance, and the rule is the older and larger the home, the more needs spending.
Estimating a budget
Set aside a budget of around 1% of the property value – so a $150,000 home should have an annual $1,500 budget, which works out as $125 a month.
Don’t forget to take HOA fees in to account – they can change your budget hugely.
HOA or Homeowners Association fees are are a service charge paid by owners in a condo complex to cover the costs of master insurance, maintenance, landscaping, water, sewer, and garbage collection.
The fees are generally paid monthly and cost on average $100-$700 per month
Expenses to remember
The amount depends on the property – those with a concierge, pool, fitness centre or valet will cost more.
The sale listing or property manager or property manager will be able to give the details.
Depending on whether you pay HOA fees, you may need home insurance – and don’t miss out add-ons like earthquake, flood, umbrella liability, HO-6 interior condominium unit policies – similar to home contents cover – or any other special insurance you may need.
Contact the county assessor for some idea of property taxes – don’t rely on what the seller says because your levy could be very different.
Letting agents or managers will charge around 7% of the rent, and will probably include other admin charges.
Don’t forget to factor in rental voids, gardening, utilities and pest control.
