As a real estate investor, you may wonder: What is included in the operating expenses for a rental property?
The term “operating expenses” generally refers to the recurring costs of running and maintaining a rental property. Accurately estimating these expenses is essential because they affect a property’s net operating income, cash flow, valuation, and ability to support financing.
Operating expenses should not be confused with rental income, mortgage payments, or major capital improvements. For example, routine plumbing repairs may be treated as an operating expense, while replacing an entire roof is generally considered a capital expenditure. The classification and tax treatment of an expense can vary, so investors should consult qualified accounting and tax professionals.
Maintenance expenses cover the work required to keep a property safe, functional, and marketable. Common examples include:
Maintenance costs can vary significantly from year to year. Investors should review the property’s age, condition, inspection results, and repair history instead of relying exclusively on a fixed percentage of the property’s value.
Older properties and buildings with aging systems may require larger maintenance reserves than recently renovated properties.
Property taxes and insurance premiums are typically among the largest recurring expenses associated with rental ownership. Investors should verify current costs and consider whether they may increase after the acquisition.
Common expenses in this category include:
A seller’s current tax or insurance cost may not reflect what the buyer will pay. Taxes may be reassessed following a sale, and insurance premiums can change based on the property’s condition, location, claims history, and available coverage.
Investors who hire a professional property manager should include management and leasing fees in their operating budget. The amount and structure of these fees vary by market, property type, and level of service.
Potential costs include:
Even investors who self-manage should consider the value of their time and the systems required to collect rent, respond to tenants, coordinate repairs, maintain records, and comply with applicable laws.
The landlord may be responsible for some or all utilities, particularly in multifamily properties without separately metered units.
These expenses may include:
Investors should review existing leases to determine which utilities are paid by tenants and which remain the owner’s responsibility. Utility usage should also be evaluated using historical bills rather than seller estimates whenever possible.
Operating a rental property can also involve administrative and professional costs, such as:
These costs may appear small individually, but they can materially affect returns when combined across multiple units or properties.
Net operating income, or NOI, measures property income before financing and certain ownership-level costs. A simplified calculation is:
Effective gross income – operating expenses = net operating income
Mortgage principal and interest are generally excluded from operating expenses when calculating NOI because they depend on the investor’s financing structure. Capital expenditures, depreciation, and income taxes are also typically excluded.
Investors should still account for these costs when calculating actual cash flow. A property can produce positive NOI while generating limited or negative cash flow after debt service, major improvements, and other obligations are paid.
Vacancy and unpaid rent also need to be considered. Although they may be shown as reductions to potential income rather than operating expenses, they reduce the amount available to cover expenses and debt service.
Before acquiring a rental property, investors should request and verify:
The budget should distinguish recurring expenses from unusual, one-time costs. Investors may also want to stress-test the property using higher assumptions for taxes, insurance, vacancy, utilities, and repairs.
Understanding operating expenses helps investors evaluate a property’s true income potential. A complete budget should account for routine maintenance, taxes, insurance, management, utilities, professional services, and other recurring ownership costs.
CoreVest provides business-purpose financing for residential real estate investors, including long-term rental loans evaluated primarily using property cash flow. Learn more about CoreVest’s 30-Year DSCR Loan, or contact our team to discuss financing for an eligible rental property.
This article is provided for informational purposes only and does not constitute legal, tax, accounting, investment, financial, real estate, or lending advice. The classification and treatment of expenses vary by transaction and jurisdiction. Investors should consult qualified professionals regarding their individual circumstances. All loans are subject to underwriting, credit approval, eligibility requirements, and applicable terms and conditions.
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