| Last month I wrote about how to find good rental properties using the buying techniques learned from ForeclosureS.com. This month I will discuss basic budgeting principles to maximize cash flow on rentals.
Planning is always the first step in any endeavor. Create a simple monthly budget for each property. Identify the most common monthly income and expense categories. For example, a rental property owner would include rent received as income and mortgage interest paid for the property as an expense. Income includes rent, garage rent, late charges, etc. Do not include security deposits and pet deposits as income as these are deposits and must be returned to the tenant after move out per the requirements of the lease. Security deposits should be indicated on the lease and held in a separate bank account. Do read your state laws concerning security deposits as some states require you give the interest earned on tenant security deposits back to the tenant when they move out. Tracking your expenses accurately is the key to maximizing your tax deductions on a rental property. Expenses should include; mortgage principal, mortgage interest, property taxes, property insurance, utilities, repairs and maintenance, advertising and vacancy loss. Utilities should only include the portion for which you are responsible – commonly water, sewage and trash. Vacancy Loss is the amount of time your property remains unoccupied. Vacancy Loss should be prorated by dividing the monthly rent amount by the number of days in the month and then multiplying that by the number of days vacant. For example; a property that rents for $1,500/mo and was vacant for 15 days would show a $750 vacancy loss for that month. ($1,500\30 = $50 X 15 = $750). Even if you include the above listed expenses in the total rent amount, you should itemize them in your budget in order to separate the income from the expenses. This is very important when it is time to prepare your taxes and will also show you areas where you could budget more cost effectively. The following is an example of what your budget should look like. + Income:
- Expenses:
+ Monthly Cash Flow:  The overall goal of having a budget for each rental property is to track expenses, take full advantage of your tax deductions, and maximize your cash flow. Following these simple steps will help you to build a very profitable portfolio of rental properties. Happy Renting, Daryl White  |
