Rentals = Millions? Not so fast.
The idea that rentals = millions of dollars is almost laughable. Maybe a fully paid for property, but let us take a closer look at this common misconception. Most rental property owners cash flow extraordinarily little after all expenses are paid.
Breaking down the rental dollar:
According to the National Apartment Association “Breaking Down One Dollar of Rent”
- About 14 cents of every rental dollar goes to property taxes. Let’s remember where those tax dollars go. Supporting the community, schools, emergency services and other local needs.
- 16 cents of every rental dollar goes towards operating expenses. Think property and liability insurance. Utilities and ongoing maintenance like an appliance breaking or pest control.
- 12 cents of every rental dollar is spent on capital improvements like a new roof, HVAC replacement, new windows and other items that upgrade the home quality for residents.
- 10 cents of every rental dollar pays for the people who help maintain the property. Managers, leasing, accounting and all the resources that go along with that.
- 38 cents of every rental dollar pay the mortgage.
- 10 cents of every rental dollar may go to the property owner. Many of whom live off of this amount. So when rent is not collected it can have a critical impact on that homeowner.
What is not considered?
This dollar does not even touch on the turnover costs. When residents move there is painting, flooring cleaning or replacement, cleaning and rekey that usually averages 3-5 thousand dollars. This also does not include any emergency service like a leak. Remediation and restoration services while often partially covered by insurance, it is not guaranteed. This can also lead to thousands of dollars in loss rent or maintenance expense. Lastly, let us also not forget to bring up potential legal costs for advisory services, evictions and proper notices.
Considering average rent, most homeowners take home less than $200 a month, assuming there were NO maintenance expenses, or you know a pandemic. Hopefully, the owner saved most of it for the unknown emergency or legal situation that could pop up. Housing providers are in for the potential long-term return on the investment. They are in this business for the altruistic feeling of providing someone else a home in a city they love. Being a housing provider is a huge risk, with truly little thanks.
Next time you think of your landlord (housing provider), do not picture the monopoly man. Picture your mom, dad, aunt, grandpa, friend, and neighbor. Rentals = Millions, not so fast.