There is a date each year when we complete paying taxes, insurance, pensions and all those ancillary costs that take cash from our earnings and begin to keep the remainder for ourselves. In Europe’s lower taxation economies such as the UK it’s around July, in Sweden nearer to September. In South Carolina, it’s pretty similar to the UK, though for different reasons. Exactly the same holds true for your property rental so we thought it would be interesting to take a look at a few examples to see just where the cash goes and why.
We took two properties of similar size, but in different Charleston markets:
| PROPERTY ADDRESS: | 233 Ashley Avenue | 406 East Ashley Avenue |
| LOCATION: | Downtown Charleston | Folly Beach |
| HOME TYPE: | Historic Charleston Single House | Modern 4-Bedroom Home |
| USAGE: | Student Rental | Short-term Vacation Rental |
| NOTES: | Refurbished in 2015; FEMA Flood Zone X |
Both properties would appraise for a similar market value and have been operating in our portfolio for multiple years so they can be considered stabilized.
What are the costs that each investment property must cover?
Finance: Mortgage interest and capital repayment
Management Fees:
- 8% for long-term rental management, which is mainly dealing with small tenant issues and making sure leases are renewed or new tenants secured on an annual basis.
- 20% for short-term rental as this is much more labor intensive oversight: managing guest arrivals and departures, cleaning, upkeep, guest services & review management (that’s a topic for another blog), strategy and execution for first-class marketing, and vigilance to maintain rates and occupancy.
Insurance: In Charleston, investment properties can be greatly impacted by the Atlantic hurricane season which can require wind & hail insurance, flood insurance (where mandated), and general liability plus an umbrella policy to lift the maximum coverage.
Property taxes: Both properties are classified as “second home, ” so subject to the higher 6% assessment.
Maintenance: As a general rule, we factor something in the neighborhood of 0.25% of the property value each year for maintenance & upkeep, with the historic property downtown needing less frequent, but more expensive intervention. The Folly Beach vacation rental also has a large yard and pool which further increase maintenance costs of that property.
Capital expense: This is limited to the short-term rental where we have to replace fixtures, fittings, towels, sheets, light bulbs and so on as we cannot expect the tenant to cover these costs.
Income:
| PROPERTY ADDRESS: | 233 Ashley Avenue | 406 East Ashley Avenue |
| LOCATION: | Downtown Charleston | Folly Beach |
| MONTHLY INCOME: | $7,000 | Seasonal |
| ANNUAL INCOME: | $84,000 | $140,000 |
| NOTES: | Steady all year, no vacancy period | Peak rental from May – Sept. |
So how do these costs stack up against the cost of operations? in which month do we start to see a profit?
We allowed for monthly payments on most items except for insurance and city taxes which are paid at the start of each year. These latter two are large amounts that will wipe out any early income through the spring. Also bear in mind that we will continue to pay additional costs throughout the year and in this exercise are just looking at when the investment begins to show a profit.
The answer for us was quite surprising given the disparity in projected gross income between the two properties. July is the magic month! After this month both properties will no longer be a drain on finances and will begin to contribute real income. That is not to say that all income goes to profit – far from it – but it does mean that the major costs of taxes and insurance are paid off and you have likely covered all of the smaller costs to date.
So when your sweet tea ice has melted and the steamy weather feels near unbearable, think of July as also the month when your investments move into the black and you begin to reap the rewards of all that risk and hard work. July really is a magical month!
Note: These two examples are typical of many properties we either own or manage. Costs do vary a little but it’s pretty typical of what we see in Charleston SC, given good business practices and sound marketing. If you have an investment property downtown or on Folly Beach, or are interested in the process of procuring one, just ask us. We are committed to helping client’s achieve success whatever their income goals.
Interested in Learning More?
Our expert teams - from development, investment, real estate, and property management - have experienced it all and have the insight to help you along the way.
Find Out More