The most important part of buying a rental property is doing your due diligence. This includes figuring out the rent you will earn, any repairs needing to be done, and estimating your monthly expenses. To help you, we’ve created this list of 4 costs associated with a rental property in Baton Rouge, LA.
When it comes to investing in rental properties, it’s easy to think your income will be the amount of your tenant’s rent minus the mortgage (if you have one). But remember that your profit doesn’t come from the gross rent but what’s left over after your expenses. For that reason, here are 4 costs associated with rental property in Baton Rouge that you should consider when purchasing your property.
4 Costs Associated With Rental Property In Baton Rouge
#1. Taxes And Fees
One of the costs you’ll have is the property tax. There could also be school taxes, municipal taxes, waste and recycling taxes, HOA fees, as well as any potential income tax on your rental income. We can’t give you an exact amount since taxes differ in every area. You can talk to other investors to gather information about the taxes associated with your potential rental property, which should be one of your priorities. Here is a resource to get you started if you want an estimate of what your potential property tax may be: http://www.tax-rates.org/louisiana/property-tax.
You’ll want to get the rental property insured not only to protect your property but to protect yourself. When you purchase the insurance, make sure it covers the rental property and structure against damage (such as fire or flood). Flood insurance is also something to consider when buying rental property in Baton Rouge. Some areas have flooded in the past and some haven’t which means your property may have a higher flood insurance cost. This shouldn’t deter you but it’s a cost you’ll want to consider when purchasing your property and drafting your potential lease agreement. You’ll also want to consider liability insurance as well in case your tenant or a visitor hurts themselves. It’s also not out of the norm to ask tenants to carry renters insurance on their belongings as well, since it also includes liability in case someone gets hurt due to their negligence.
Another cost which may be harder to estimate ahead of time is the upkeep cost. This includes things like the costs to maintain and repair the furnace, hot water tank, roof, plumbing, and electrical systems in the house. Here are some percentages you should consider in your calculations: Capital Expenditures (the improvements you plan to make to the property over time), vacancy expense, and a repair budget. Setting aside 5% for capital expenditures and another 5% for the repair budget is a good place to start. Over time, you can start adding up the expenses each month and start averaging those out to get a more accurate percentage. For the vacancy percentage, it would be a good idea to assume the unit may be vacant one month out of the year. 1/12= 8.3%. Set that aside as well. If these percentages don’t appeal to you, maybe try the 50% rule. This is the rental income minus the mortgage divided by 50%.
Example: $2,000 rental income – $1,000 mortgage= $1,000/ 50%= $500
This is $500 cash flow and $500 to set aside for expenses, taxes, capital expenditures, vacancies, etc.
This lastThis last cost might surprise you but it’s the cost of you owning a rental property and having to deal with tenants. You’ll have to spend time finding a tenant, doing a background check, making sure they pay their rent, and occasionally checking on the property. And since this will be your time, it’s something to consider. However, this can be minimized with an investment into a good property and perhaps a property management team. (If you hire a management team, this is also a cost you will want to take into consideration).
This list shouldn’t deter you from investing into a Baton Rouge rental property. Instead, it should encourage you to know some of this ahead of time so you can plan better for your investment. There are many landlords going bankrupt because they do not take these costs into account. This list will set you up for success. The truth is every investment has costs. These can be transaction fees or management fees charged by your stockbroker or mutual fund manager, or it’s these 4 costs associated with rental property in Baton Rouge. What’s important for you to decide is whether the benefits outweigh the costs. When it comes to rental property, we believe they do.