How Rental Property Expenses Change Over Time
Surprising Differences Between Expense Changes on Rentals
The above is an image I made for a class I taught back in 2016, but I wanted to use it to talk about how different rental property expenses change over time.
Rental Property Expenses
First, what are the expenses you typically see on rental properties?
Mortgage Payment (Principal and Interest)
Property Taxes
Property Insurance
Homeowner’s Association
Maintenance (and CapEx)
Vacancy
Landlord-paid Utilities
Property Management
It is possible that some properties will have expenses not listed here, but this should cover the majority of rental properties.
Rental Property Expenses Change
Now that we know what the expenses are, let’s look at each of them tends to change over time.
Mortgage Payment (Principal and Interest)
Often the mortgage payment is the largest expense when a property is first acquired.
For interest-only loans, there is only an interest payment. There is no principal part of the payment.
For amortizing loans (loans that get paid off over time) there is an interest component and a principal component.
Despite the mortgage payment typically being the largest expense on your rental property when it is first acquired there are some interest qualities to that expense that are different from other expenses.
They are:
The mortgage payment typically does not change over time—and specifically it typically does not increase with inflation. So, as things around us become more expensive from inflation over time, the mortgage payment feels increasingly smaller. Imagine, you got a mortgage payment today or $2,000 per month for principal and interest. A burrito is about $10. So, it takes about 200 burritos to pay your mortgage. Fast forward 25 years in the future with a 3% per year inflation rate and that $10 burrito now costs about $20 from inflation. So, your mortgage payment is only about 100 burritos. So, it feels cheaper over time compared to what everything else costs. No other expenses act quite like that.
The mortgage payment eventually goes to zero. If you have an amortizing loan, eventually—at the end of the amortization period—the mortgage is completely paid off and you no longer have that expense at all. No other expenses act like that.
Property Taxes
Property taxes are based on the value of the property as determined (assessed) by the county you live in.
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