What Are Operating Expenses in Real Estate?

By | November 10, 2022

What Are Operating Expenses in Real Estate?

Operating expenses are unavoidable costs in real estate that must be budgeted and planned for before they can be managed. Operating expenses vary widely by type and location, as well as by the specifics of your property.

Real estate operating expenses include all direct and indirect costs related to running a real estate business, such as mortgage payments, property taxes, maintenance fees, insurance premiums, legal rates and services, marketing and advertising costs, accounting and legal fees, general management costs, accounting software licenses, and more.

Operating expenses are one of the most common types of expenses in any real estate portfolio because they’re almost always necessary. Read on to learn more about operating expenses in real estate.

Operating expenses are the costs of running your real estate business. These costs vary from property to property and from location to location, but operating expenses can be broadly categorized as either leasing or management fees.

Operating expenses can run the gamut from monthly utilities to repairs for common wear and tear on a property and beyond. Some operating expenses are fixed monthly costs, like mortgage interest and taxes.

Other operating expenses can be variable based on the number of properties in operation as well as the square footage of each individual property and the type of capital being spent. Here’s everything you need to know about operating expenses in real estate

What is a fixed Operating Expense?

A fixed operating expense is one that does not vary based on the number of properties in operation or the size of the property. This can include monthly expenses like mortgage interest and property taxes.

Other fixed costs include operating and maintenance expenses associated with a single property, like real estate agent commissions. Real estate agents generally earn a percentage of the first year gross income of the property they sell, often between 1% and 6% of the sale price.

Some agents also earn a percentage of the buyer’s subsequent year income, increasing their take at the same rate. A fixed operating expense is one that cannot be avoided by choosing to not have a real estate business. Costs like this are often unavoidable, so knowing what’s coming in and out of your company is a good way to stay on track.

What is a Variable Operating Expense?

A variable operating expense is one that costs you a certain amount each month and is based on the number of properties you have in operation and the size of those properties.

This can include property taxes and insurance, which are often higher for properties with a higher resale value like homes. It can also include expenses for property maintenance and repairs that are higher for larger properties like apartments.

If you own multiple properties, you will pay a higher percentage of this variable operating expense each month as well.

Total Operating Expenses

The bottom line in this equation is total operating costs, which are the sum of lease fees and management fees. These costs vary from property to property and from location to location.

But they can be broadly categorized as either leasing or management fees. Total operating expenses can vary greatly depending on the type of business you have.

How to Calculate Total Operating Costs

Simply add up all of your monthly operating expenses to arrive at your total operating costs. Then you will have the bottom line in this equation, total operating costs.

Mortgage Payments and Loan Interest

Mortgage payments are fixed costs that are generally included in monthly operating costs. There are no monthly mortgage payments if the mortgage is paid in full at the end of the sale contract.

If a mortgage is taken out on the property, monthly mortgage payments will be based on the amount borrowed and will vary depending on the type of loan taken out.

Mortgage interest on loans is also a fixed cost, but how much you pay will depend on the size of the loan you take out and how long you have it for.

Property Taxes and Insurance

Property taxes will vary greatly depending on the type of property and location. Residents of high-income areas will pay more than those in lower-income areas. Insurance costs can vary greatly depending on where you live and the type of risk you take on with your property.

Repairs and Maintenance

Repairs are generally fixed expenses that are the same for each property you own. Maintenance is a variable cost that depends on the type of property, the square footage of the property, and the length of time the maintenance is done.

With regard to maintenance, a one-time short-term project may be considered maintenance, whereas a long-term project is considered repair. It can be confusing, but generally speaking, if you have to fix a problem, it’s a repair, but if you have room to expand, it’s maintenance.

It’s important to take stock of both your fixed and variable operating expenses so you can make informed decisions about where to cut costs.

Other Operating Costs

Real estate agents generally earn a percentage of the first year gross income of the property they sell, often between 1% and 6% of the sale price.

Some agents also earn a percentage of the buyer’s subsequent year income, increasing their take at the same rate. Other operating costs include marketing, accounting, and legal costs. Many experienced real estate agents use a broker to manage the core aspects of their business.

Real estate brokers are licensed and regulated in most states. Brokers are licensed to represent both buyers and sellers. While these costs vary greatly based on the type of business you have, it can be a good idea to look into these other operating costs so you can make informed decisions about where to cut costs.

Bottom line

Real estate operating costs will vary greatly depending on the type of business you have and the location of the property. There will be some fixed operating expenses, like property taxes and insurance, that will not change based on the amount of properties you own.

There will be other variable operating expenses that are based on the number of properties and the size of those properties. Total operating costs will vary greatly based on the type of business you have and the location of the property. It can be a good idea to look into other operating costs so you can make informed decisions about where to cut costs.

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