Insurance On Rental Property Cost
Insurance On Rental Property Cost
Insurance On Rental Property Cost - In Part 1 of this series, we discussed the various methods you can use to arrive at the expected rental income of the target property you are analyzing. In Part 2, I'll explore how to properly evaluate all of your costs and put them together in the RIA Property Analyzer to determine if your target property is a good deal that meets your investment goals.
If you haven't already done so, you can download the RIA Property Analyzer for free and follow this example.
Insurance On Rental Property Cost
Insurance On Rental Property Cost
First, a quick recap of part 1: we analyzed this property that was from a tenant for $650. However, we have found through various methods that the market rent can actually be quite a bit higher.
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Before we left, I set up the RIA Property Analyzer with two columns, one to analyze the property based on the current rent of $650 and the other to show the numbers with the higher market rent of $725 - this is what it looked like:
The toilet does not flush. The air conditioner turns off. The lock on the front door breaks. There are many things that need to be repaired in your rental property, so you need to factor in these costs.
Investors typically set this budget as either a percentage of rent collected (eg 10%) or an annual percentage of the home's price (eg 1%). I use the last method. However, it is also reasonable to expect that newer or recently renovated homes will have lower maintenance costs than those that are older and need a lot of work. To account for this, I created a sliding scale calculation in RIA Property Analyzer based on the state of the house like this:
You can judge the condition of the house based on the photos and the language used in the listing. The second option ("good condition") is a reasonable estimate for most rental properties or when it is difficult to tell the condition of the house from the listing. But if the interior and exterior look bright and the menu says that it was recently renovated, you can choose the first option. If the house looks pretty old and hasn't been updated inside, or if the listing says things like "needs some TLC" or "sold as-is," the third (or even fourth) option is probably best.
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However, if you plan to work on the property immediately after you buy it, you should select the condition the property will be in AFTER the work is completed and enter the expected cost of your remediation in the "acquisition cost" line. - more on that later.
As you can see, the listing photos show a newly remodeled kitchen and bathroom, new vinyl flooring throughout, and fresh neutral paint. The exterior also looks in good condition. In short, it looks like a recently renovated turnkey rental.
I believe these photos were taken before the current tenant moved in, which was less than a year ago - although it is possible they are somewhat older. Still, they look great, and the listing says the house has been "recently renovated." Deeper into the buying process I would ask when exactly the renovation took place and what work was done - but for now I think it's fair to call it "new or recently renovated".
Insurance On Rental Property Cost
So I go ahead and enter it into the RIA Property Analyzer as shown. (Note that for each expense I will write them in both columns so that I have a full budget for both rental scenarios.)
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Property taxes are assessed and collected by municipalities to finance schools and other projects. How much you pay in property taxes can make a big difference in your returns. (Wondering which markets tend to have high but low property taxes? This post will help.)
There are several "quick" ways to estimate property taxes. For example, property tax history is included in the Zillow listing, which is based on public records they can obtain. Zillow also calculates taxes in the "Monthly Costs" section by multiplying the purchase price by the average local tax rate. (There are other online calculators that use the same "prevailing tax rate" method to estimate property taxes.)
However, as you can see, it's dangerous to take these numbers at face value - even in the same registry, the numbers don't match wildly:
Which number should you use - $259, $598 or $939? This is why you should not use food at all. Instead, look up the EXACT property taxes on the website of the taxing districts, usually the city and/or county. Just make sure you understand these jurisdictions and how taxes are levied/collected - for example in Memphis there are both city and county taxes and they are collected separately so it would be easy to look up city taxes and miss county taxes.
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Do your due diligence - Property taxes are a big line, so it pays to understand exactly what you owe.
I went to the Memphis and Shelby County property tax websites and looked up this property by address. Here is what I found:
Including both taxing districts, the total annual property taxes for this property are $586.92, so I plugged it into Analzyer, like this.
Insurance On Rental Property Cost
You should always have your property insured – and if you're taking out a mortgage, your lender will require it. But how much will it cost?
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Since insurance rates don't vary much and it's not an expense that will make or break your investment, this is one instance where using a plan will probably suffice. Zillow provides an estimate in the "Monthly Costs" section, but like the tax information found there, it can be unreliable. (For example, on my target property, Zillow suggests $265 per year for insurance, which is too little.)
Insurance prices are generally measured by the square footage of the home and also depend on the deductible you choose. But in typical rental markets, I think a conservative estimate of $500 per year for smaller homes and $800 per year for larger homes is fine. This will be close enough for your model and you can always refine it when you get an actual quote from the insurance company later in the process.
Since I already have insurance in my Memphis portfolio, I can make better estimates. My current premiums range from $384/year to $698/year - and the largest homes cost the most.
Since my target property is a smaller house, I'm confident I can insure it for $450 or less, so that's the valuation I'll use in the RIA Property Analyzer, as you can see here.
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A note on flood insurance: If your property is in a flood zone, you must purchase flood insurance. The Federal Emergency Management Agency (FEMA) publishes online maps and tools to help you determine if your property is at risk of flooding—but the Risk Index is the best online resource because it uses data that's deeper and more up-to-date to assess flood risk. any kind of property.
Like most people in Memphis, my target property is not at risk of flooding and therefore does not require flood insurance. If your property requires flood insurance, include this additional cost in your policy.
Your property manager's primary commission will be a percentage of the rent collected, usually between 8-10%. If you manage the property yourself, you can of course skip this point – but given everything a property manager will do for you, I always recommend hiring one.
To find out what property management rates are in your market, you can contact a few of them directly and ask – they may even post this information on their website. Or if you're in a hurry, you can just use 10% as a rough estimate.
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At some point, your property will be vacant between tenants for a while. You won't be collecting rent during these times, so you need to factor that into your plan.
If your property changes tenants every two years and is vacant for a month at each turn, that's a 96% occupancy rate (or a 4% vacancy rate). Although the vacancy rate in my portfolio has been only 3% for several years, I always recommend using a 5% vacancy for financial modeling purposes - however, you can use a higher amount if you want to be even more conservative in your estimates .
In single-family homes, tenants usually pay all utility costs. However, if you are buying a small multi-family home (such as a duplex, triplex or quadruple), you may be responsible for some or all of the utilities. The previous owner should provide records that will allow you to estimate these costs.
The tenant pays the energy in my central area, so I don't have to charge any costs in the analyzer.
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Expect a monthly Home Owners Association (HOA) fee with condos and (sometimes)
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