Understanding what an income property costs on both a yearly and monthly basis are important considerations for the real estate investor. In addition, knowing the operating cost of each unit is important, as it helps determine the bare minimum rental rate. No one ever said owning income property was cheap! There are many expenses that need to be taken into account, such as:
- Mortgage payments
- Utilities (if included)
- Maintenance and repairs
- Legal and professional fees
Using a spreadsheet, an investor will lay out all of these costs for a year. Adding them together gives the investor a figure known as the Gross Operating Expenses (GOE). It may be necessary to estimate some figures, based on previous years, capital improvement plans, and other factors. An example of this would be the need for a new roof on a property in a previous year causing a higher than average maintenance cost for the year.
Expenses for things such as taxes, utilities, and insurance are probably going to go up every year. This inflation needs to be accounted for in the GOE. Based on data available at the time of this writing, the average inflation rate on a per year basis since 1914 is 3.43%. [InflationData.com] Using a figure of 5% is therefore well within reason.
Once a GOE + Inflation (iGOE) figure is determined, an investor will have a rough idea of what a building will cost to own and operate for a year. This figure will then be divided by the number of units in the building, giving the Annual GOE for each unit (uGOE)*. Further dividing the uGOE by 12 months delivers the Monthly Unit GOE (muGOE)*. This may seem like a headache, but you can’t get where you want to be without knowing where you are starting!
The muGOE should be the absolute bare minimum that would be charged for rent, assuming the property never turns a profit!
Knowing what a building costs to own and operate over the course of a year is important to the investor, for planning purposes, as well as in the event of a building sale. Knowing what each unit costs to operate on a monthly basis is just as important, as it will help determine the minimum acceptable rental rate, assuming the market will support it!
* These abbreviations are not standard, and are used only to assist with the flow of the article.