What expense ratio should I target for rental properties?
▼
Target an operating expense ratio (expenses ÷ gross rent) of 35–50% for most rental properties, excluding debt service. Single-family homes typically run 35–45%. Older properties and multi-family units tend to run higher. Properties in cold climates have higher utility/maintenance costs. If your expense ratio exceeds 55%, you likely need to raise rents, reduce expenses, or reassess the investment.
What is CapEx (capital expenditure) in property management?
▼
Capital expenditures are major improvements or replacements that extend the useful life of a property component — roof (lifespan 20–30 years), HVAC system (15–20 years), water heater (10–15 years), appliances (8–12 years), flooring (10–20 years). Budget 5–10% of gross annual rent as a CapEx reserve. Without this reserve, a single large repair can wipe out years of cash flow.
Should I hire a property manager or self-manage?
▼
Property managers typically charge 8–12% of monthly rent plus leasing fees (50–100% of first month's rent). Self-management saves this cost but requires your time — estimate 2–5 hours per property per month when occupied, significantly more during vacancies and turnover. Self-managing makes sense if you have time, live near your properties, and have fewer than 5 units. For out-of-state or larger portfolios, a good property manager often pays for themselves in reduced vacancy and better tenant retention.
What maintenance costs should I budget annually?
▼
Budget 5–10% of annual gross rent for routine maintenance and repairs. For newer properties (under 10 years), budget 5%. For properties over 20 years old, budget 8–12%. Common annual expenses: HVAC service ($150–300/year), landscaping ($50–200/month), pest control ($300–600/year), plumbing and electrical repairs ($500–1,500/year). Always maintain a cash reserve of 3–6 months of expenses per property.
How do I categorize expenses for tax purposes?
▼
The IRS allows landlords to deduct ordinary and necessary rental expenses, including: mortgage interest, property taxes, insurance, repairs and maintenance (not improvements), property management fees, utilities, depreciation (over 27.5 years for residential), advertising and leasing costs, professional services (accounting, legal), and travel to manage properties. Keep separate books per property and consult a tax professional about depreciation, cost segregation, and the QBI deduction.