How to Create and Use Your Rental Property Budget

Your Blueprint for Managing

Your Rental Property Successfully

Before making any decisions as a landlord, the most crucial first step is to create a detailed budget for your rental property.

The amount of cash you have on hand should help guide all your decisions, from necessary repairs and upgrades to whether you handle cleaning, lawn care, or snow removal yourself

How will you use your budget to help guide your decisions you ask? Here are a couple of real-life examples of how I use my budgets to help guide almost every landlord decision I make:

1. I had a property with a tight budget and the refrigerator stopped working. Obviously, I had to replace the 7-year-old refrigerator, but that $900 expense was not something I was anticipating. So, after purchasing the refrigerator I took a look at the budget for the remainder of the year and determined that the replacement of the front steps which was in the budget more for cosmetic reasons than anything else would wait till next year.

2. I had a tenant move out of a rental unit and had budgeted to spend $3,000 on the turnover, I could not spend anything above that amount. Once I got into the vacant unit I realized I had to replace all of the locks, not just re-key the doors. There were 4 doors in the house so this unplanned expense would bring me over my strict budget. I took a look at the other things I had planned for the turnover and although I really wanted to update the light fixtures I knew that in this rental unit, the light fixture replacement wouldn’t bring an additional amount of monthly rent and wouldn’t help me rent the unit any faster so I didn’t move forward with replacing the light fixtures.

3. When looking at how tight the first year would be, an owner who lived down the street from their rental property determined that they could handle all lawn care on their own to save on mowing expenses.

How do you start a budget? In short, begin by considering your income (how much rent/pet fees/parking fees you will collect), and known and necessary expenses to get you through the first month and each month thereafter. It doesn’t have to be complicated, but it is important that it be as accurate as possible.

Below I’ll discuss budget creation in greater detail so you can get started.

The 3 Parts of a Budget:

1. Income

   Is the unit currently occupied? How much are you collecting for rent each month?

   Do you collect pet fees?

   Do you collect parking fees?

   How about laundry income?

   Do you plan to keep the current tenant?

   How long will it take to get the unit rented and what will you be able to collect for rent?

2. Landlord Expenses

Here’s a brief list of common expenses you’ll need to consider in your budget:

• Mortgage Payments

• Property Taxes

• Homeowners or Landlord Insurance

• Utilities (Water, Heat, Electricity)

• Property Maintenance and Repairs

• Tenant Turnover Expenses (painting, cleaning, flooring)

• HOA Fees (if applicable)

• Property Management Fees (if applicable)

• Office Supplies or Technology

• Tenant Screening Costs

• Permitting Fees

• Legal Fees

• Reserves for Unexpected Expenses

It’s important to plan for regular maintenance items such as boiler cleanings and inspections, trimming the shrubs, and replacing old and malfunctioning appliances. Also, anticipate larger projects like replacing the roof or renovating the kitchen or bathroom.

Accuracy in budget planning is crucial for managing your rental property effectively. Determine how you’ll handle most of the work that will be done.

Are you going to be able to repair a leaky faucet? Will you mow the lawn? How about painting a vacant unit?

Doing the work yourself will save money, but this plan only works if you’re capable and committed to completing the work properly and timely.

Estimating costs without proper research can lead to financial shortfalls and unexpected stress. If you’re unsure about the cost of a repair, renovation, or regular maintenance, take the time to do your research.

Start by calling local contractors for quotes.

Ask friends or other landlords who’ve had similar work done.

You can also check local forums or community groups for insights.

The more accurate your estimates, the better prepared you’ll be to manage your property without financial surprises or shortfalls.

3. Net Operating Income (NOI)

This is your bottom line. Income - expenses = NOI. You bought the property as a financial investment so ultimately you want this number to be positive, but how quickly do you need your monthly NOI to be a positive number? Did you anticipate having to invest money into a rehab of the property? Did you buy an investment with a vacancy to be filled? Do you have money in savings that you planned to spend or can spend? The answers to all of these questions will help you determine how to move forward with many of the decisions you’ll find yourself having to make regarding your investment property.

And I Have a Couple of Additional Points:

1. No matter how careful you’ve been in purchasing this property, surprises are inevitable. Do not forget to plan for the unexpected.

As a landlord, you’ll likely face situations where you need to spend money you didn’t anticipate spending. So, in addition to budgeting for known expenses, it’s wise to set aside extra funds—I suggest 10-20% of your total budget—for unexpected costs that will inevitably arise. If you skipped inspections at the time of purchase, you may want to increase that number.

Recently, I managed a property where the basement flooded during the first rainstorm after the purchase. We discovered that the house gutters needed replacing, and we also had to install a sump pump. After doing that work we had to clean up the mess the flood left. I was happy to have worked with the owner to create a conservative property budget for the first year of business so we were able to get the necessary work done without too much stress about the money it was costing us.

2. The Software:

As a landlord, you have several software options for creating and tracking your budgets, as well as streamlining your financial management. If you own just one or two properties, tools like QuickBooks or Excel offer customizable templates for tracking income and expenses. If you own more properties you’ll want to consider purchasing property-management-specific software to assist with the job.

3. Don’t be afraid to adjust your budget as you move along.

I recommend taking the time to complete a budget for each month of the year. As you move forward you’ll learn more about your property or you’ll have issues that arise that will require you to make changes in the budget for the property. Knowing the changes in your NOI will allow you to adjust any plans you may have for the property.

So, remember, before making any decisions regarding your rental property, take a close look at what you have today, what income you can expect from rent and the expenses you’ll need to cover. A clear, realistic budget will help you manage your property effectively, avoid financial stress, and make informed decisions that protect your investment property.