Home versus rental property expenses

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More “help” in your quest to become a millionaire?

Sewer

Natural gas

Electricity

Same deal. The more tenants you have, the more electricity they are using to watch their TV, cook (if you have electric ranges), run lights, computers, refrigerator, air-conditioner, dishwasher, clothes washer, electric dryer and so on. The incremental consumption caused by each incremental tenant is probably proportional to the number of persons in the household. For example, a building that six people live in uses twice as much electric as an identical building where three people live.

Trash

Trash removal is generally also “metered” in the sense that increases in the number of people who live in the building likely require the frequency of pickups and/or size of the trash containers to be increased.

This list of utilities is what are defined as “variable” costs in accounting. They rise and fall with any change in your number of customers or sales—tenants in the real estate business. 

To get a comprehensive, accurate list of your variable costs that are caused by tenants, look at your utility bills. If you have no tenants, disconnect all the utilities and cancel trash collection. That will require winterization of the plumbing if you have freezing temperatures. 

If you do that, which I do not recommend, you will see exactly how  much having tenants is costing you in consumable, exactly what your variable costs are. The bills that you would still have to pay in that circumstance—taxes, insurance, landscaping, some exterior repairs—are your “fixed” costs.

EmptyIng your building of tenants to measure variable costs would be dumb, but you probably have vacancies from time to time where you could see the drop in variable costs in your bills. Also, if you rehab a vacant building, your only utility cost are likely to be zero or just  construction-related use of electricity or climate control.

By the way, if your building has no occupants, it is generally very difficult and very expensive and may be impossible to obtain insurance. If you lie about having occupants when you do not, that could invalidate the policy and/or violate law.

Separate meters

Are gas and electric not variable costs if the tenants have their own meters? Not really. The tenants pay the utilities either directly when there are separate meters or indirectly through the landlord when there are not. The difference in rents between a tenant-pays and a landlord-pays utilities apartment is approximately the amount of the utility bill from the separate meters. It’s a wash.

Delivered fuels

Some homes are heated with #2 heating oil or propane which is delivered periodically to the building during heating season. Each additional person living in your building raises this expense. But these actually  can have an economy of scale.

I was first VP of a local apartment association in South Jersey for a while. Once, when the president went to FL, I ran the monthly meeting and decided to go through the list of apartment expenses and subcontractors asking the members whom they got the best deal from. When it came to heating oil, it occurred to me that we, as a group, might be able to get one dealer to give us an association discount. 
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Boy, did we! A couple of dozen members agreed to switch to the low bidder based on a discount off the Wall Street Journal price of the day of the delivery. We got a very large discount. My mom occupied her single-family home and I got her in on the discount, too.
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So in “utilities” that are delivered, there are possible economies of scale—volume discounts. So if you own four or more units or so, you may be able to buy propane or #2 heating oil cheaper than if you only owned a principal residence. That is an exception the the general rule that landlords get screwed by higher prices on almost everything they buy because they are landlords rather than just homeowners.

Wear and tear and repairs

Other costs that are increased by tenants rather than owners living in the property are wear and tear and repairs. Just as tenants tend to waste utilities paid by the landlord, they tend to put more wear and tear and damage on the building.

Landlord time

Owning rental property takes about 3.6 hours of your time per unit per month. You may celebrate each new unit acquisition for its possibility of increasing your net worth, but I guarantee you it will decrease the amount of time you have to do other things. You only have 24 hours a day—720 hours per month, 240 of which go to sleep—no matter how many units you own or how rich you are. Each additional unit you acquire, takes another 3.6 hours away from other activities.

Value of your time

If your time is valuable, it is probably unwise at least in the long-term, for you to engage in working on or managing your buildings. I hasten to add that I never recommend that you hire an outside property manager. They take kickbacks from vendors and subcontractors and let rents fall below market value and use expensive subcontractors who make their job easier when less expensive subcontractors are available.
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Either be your own property manager or hire one on salary.

• Average handyman pay $18.36/hour (ZipRecruiter)
• Average resident manager pay (live on site) “17.67/hour (Indeed-com)
• Average apartment property manager (in charge of multiple properties) $22/hour (ZipRecruiter)

If your time is more valuable than this, you generally ought to have “people” whose time is worth less do it. But it would be wise to do it yourself initially before you start hiring it out so you understand it better.

Being “The Man” does not reduce your time consumption to zero. Hiring employees, which also means monitoring them, counseling them when they fail, and firing them when necessary, is time-consuming.

As a general rule, each state has a minimum number of units in the building that makes it mandatory for you to employ a resident manager. In CA, for example, more than 16 units requires a resident manager.
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Note that pay in the form of free rent or a rent discount is tax-free.
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“If as a condition of employment the resident manager is required to live on the premises, then there is no federal income tax, social security tax, medicare tax, federal unemployment insurance, or state income tax on the free rent.” IRC §119

So is the possible need to have employees and extra expense that a homeowner does not have? Yes. Plus prospective employees, employees, and former employees are perhaps the main type of law suits against landlords. Even if you have no legal requirement to have a resident manager, after one or two rental properties, you likely will have employees or independent contractors at least taking care of lawn care and maybe snow and ice removal.

Tax-preparation cost

Homeowners do not have any tax preparation cost or personal time consumption unless they itemize. Since the Trump tax law in 2017, which raised the standard deduction to $25,100 (married 2021), most homeowners have stopped itemizing. 

Even if you itemize, all you need to do is tell the Turbotax interview function your property tax amount, mortgage points that lowered your rate, private mortgage insurance, and home mortgage interest.

But if you rent rooms or apartments even in your home, you have to file Schedule E (rent income), Form 4562 (depreciation), Form 1099 MIsc., maybe Form 8960 (Investment income). This is somewhat costly or time-consuming if you do it. The more rental units you have, the more this will cost or take of your time.

Bookkeeping

Income is delightful, but bookkeeping it is just another chore that homeowners do not have, but landlords do. Both homeowners and landlords have to pay the bills, but landlords have more bills to pay, especially if they have a lot of small buildings instead of one bigger one.

Getting sued

Getting sued is extremely time-consuming. Homeowners are rarely sued. Landlords often are.
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If and when you are, you will spend time  gathering documents  to provide in discovery, giving depositions, meeting with your lawyers, attending trial and testifying. Very time-consuming.
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It is also extremely expensive if you do not have liability insurance. I will assume no one here is dumb enough to not have liability insurance.

Replacements

Both homeowners and landlords have to replace appliances from time to time and less often, roofs, and pavement and pool surfaces, etc. Landlords have to do it more often. If they have a lot of units, it becomes a regular monthly or weekly chore.

Do landlords pay less for such things—volume discount? Not really. Yes, they buy more of them, but generally one at a time. New apartment building developers buy all at the same time for each development. 

You may be able to get a frequent-buyer discount if you have a lot of units.

Principal residence (your home) is cheaper in almost every way than rental property

In acquisition, financing, operation, bookkeeping, tax preparation, and selling, your principal residence is cheaper at almost every turn than a rental property of the same value.

One building at a time is cheaper than multiple buildings

If you insist on being a landlord, owning one building at a time is more efficient than collecting duplexes and such. When you reach the number of units that requires a resident manager, you have to add that expense, but it may be cheaper than driving all over the county to inspect, mow, repair, and show a collection of little properties.

Look at the comparison at the $5 million level

I recommend that you just own one single principal residence at a time. I also recommend that your house be no larger than about 3,500 square feet and that your lot be no bigger than an acre. If you are in one of the 8 jurisdictions where you have an unlimited dollar bankruptcy homestead exemption, you must conform to their acreage limit—usually 1/2 acre or 1 acre in an urban area.

So you have worked your way up so that your sole piece of real estate is your 3,500 square foot, 3/4 acre, $5 million house. Obviously, it has one hell of a fabulous location with gold plated pubic schools and your neighbors are pro athletes.

Your twin brother decided to accumulate his $5 million of real estate in rental property. He lives in the penthouse of one building. 
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Are the two of you equal, leading the same lives?

Say his average unit is worth $40,000 counting the land under it. So he owns $5,000,000 ÷ $40,000 = 125 units. That is a job. He is probably also continuously in litigation with one tenant or another trying to get his $5 million. He has employees for leasing and maintenance including lawn mowing. If he has lots of small buildings, he is frequently replacing roofs and asphalt parking lots—constantly replacing appliances and carpet.

Three employees

Real estate investment is identical for each. One guy has never had a tenant. The other has had tenants for 30 years or whatever. As a landlord, he paid more for almost every expense from utilities to bookkeeping to insurance to tax preparation.
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Time-wise, he and his employees now spend 3.6 hours/month x 125 units = 450 hours per month. There are 4.3 weeks in a month and 40 hours per work week. That’s 172 hours per month per employee. That means this landlords operation requires 450 ÷ 172 = two full-time employees and  a third person who works 24 hours per week.
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The presumption typically is that the rental owner is making a profit on the rentals. Bull! Rental properties with mortgages typically run negative cash flow. Their owners put up with that to get the appreciation.
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And what did the homeowner only put up with to get the appreciation?
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Nothing.
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How can this be? Simple. The only profitable part of real estate ownership is appreciation. Operating rentals loses money and generates litigation.
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But don’t tenants let you buy more property? No. What lets you buy more property? More down payment money and more income to qualify for a bigger mortgage. Tenants give you zero down payment money and negative cash flow lowers the mortgage you can qualify for.
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Furthermore, when you buy an owner-occupied home, the loan-to-value ratio is higher than you can ever get on a rental property, and all the other aspects of the mortgage are more expensive on a rental property which further reduces your ability to buy the most valuable possible property at each step along the way to real estate millions.
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When you run negative cash flow you have to apply your income toward the rental property. Instead use that negative cash flow instead to apply to your home mortgage and thereby qualify for a larger home mortgage.