What are landlord operating expenses?

Landlord operating expenses are the costs you incur to maintain and manage your rental property. Knowing what counts as an operating expense helps you effectively budget the income from your rent payments and maintain profitability. It also prevents confusion about which costs are necessary for the property’s upkeep, ensuring you manage your finances accurately.

In this guide, we outline what are landlord operating expenses. We will also clarify which costs are not considered operating expenses.

What counts as landlord operating expenses?

Operating expenses are necessary costs for maintaining your property and ensuring it remains habitable and attractive to tenants. Operating expenses can differ across different types of properties, but these are some of the common landlord operating expenses: 

Property maintenance

Property maintenance includes repairs and regular upkeep of your rental property. This can involve fixing plumbing issues, painting, and maintaining the landscaping. Regular maintenance is an operating expense because it ensures your property remains in good condition, attracts prospects, retains tenants, and prevents larger, more costly problems in the future.

Utilities

Utilities cover the basic services required for a comfortable and habitable living environment for your tenants. These typically include water, electricity, gas, and sewer services. Depending on the lease agreement, you may pay for some or all these utilities.

Insurance

Insurance is an operating expense because it protects you from financial losses due to damages or liability claims. Common types of insurance for landlords include property insurance and liability insurance. Having the right insurance coverage is crucial for safeguarding your investment. 

Property management fees

Property management fees are considered an operating expense because they cover the costs of hiring professionals to manage the day-to-day operations and maintenance of your rental property. These fees cover essential management services like tenant screening, rent collection, and handling late rent payments.

Property taxes

Property taxes are mandatory payments to local governments based on the assessed value of your property. These taxes are used to fund community services such as schools, roads, and emergency services. It’s important to budget for property taxes under your operating expenses as they can be a significant cost.

Marketing and advertising

Marketing and advertising expenses are incurred when promoting your rental property to potential tenants. This can include online listings, signage, and other promotional activities. Effective marketing helps attract quality tenants and reduce vacancy periods, making them an essential cost to the running of your rental property. 

HOA fees

HOA fees are payments made to the homeowners’ association if your property is part of an HOA. These fees cover community maintenance, amenities, and other shared services. Staying current on HOA fees ensures compliance with community rules and access to shared resources for your tenants. 

Legal and accounting fees

Legal and accounting fees cover the costs of professional services related to your rental property. This includes legal advice, tax preparation, and handling situations like when you need to refuse rent payments. Using professional services can help you navigate complex regulations and ensure accurate financial management.

What doesn’t count as landlord operating expenses?

Not all expenses related to your property fall under the category of operating expenses.

Mortgage payment

Landlords often consider mortgage payments as an operating expense. However, these payments are considered financing costs rather than operating expenses. They do not relate to the day-to-day operation or maintenance of the property.

Capital expenses

Capital expenses are costs for major improvements or renovations that add value to your property. Examples include roof replacements, new HVAC systems, and extensive remodeling projects. These expenses are investments in the property, not regular operational costs. 

Income taxes

Income taxes are taxes you pay on the rental income and other personal income you earn. These taxes are not considered operating expenses because they do not relate to maintaining or managing the property. They are part of your overall financial obligations as a rental property owner.

Your personal expenses

Your personal expenses are costs unrelated to the operation of the rental property. This includes your personal travel, entertainment, and other non-property-related costs. These should be kept separate from your property’s financial records.

How to calculate operating expenses for a rental property

Calculating your operating expenses is essential for understanding the true cost of running your rental property. It helps you budget effectively, ensure profitability, and identify areas where you can cut costs.

Here’s a step-by-step guide to calculate your operating expenses:

Calculate your total operating expenses

To find your total operating expenses, list all the costs associated with maintaining and managing your property. Include expenses such as maintenance, utilities, insurance, property management fees, and taxes. Add these amounts together to get your total operating expense.

For example, if your monthly expenses include $150 for maintenance, $100 for utilities, $50 for insurance, and $200 for property management fees, your total monthly operating expenses would be $500. Additionally, if you spend $1,200 annually on property taxes and $600 on marketing, your total annual operating expenses would be $7,800. 

Calculate your total profit

To calculate your total profit, subtract your total operating expenses from your rental income to determine your net operating income (NOI). This calculation shows how much profit your property generates after covering all necessary expenses. 

For example, if your annual rental income is $18,000 and your total annual operating expenses are $7,800, your NOI would be $10,200. 

Calculate operating expense ratio

The operating expense ratio (OER) is a metric that shows the percentage of your operating expenses relative to your gross operating income (GOI). Calculating this percentage helps you assess the efficiency of your property management and compare it to industry standards. Typically, a good operating expense ratio for residential rental properties ranges between 35% and 45%.

To determine your operating expense ratio, divide your total operating expenses by your gross operating income (GOI) and multiply by 100 to get a percentage. For example, if your GOI is $18,000 annually and your total annual operating expenses are $7,800, your operating expense ratio would be 43.3%.