Operating Expenses

As the name suggests, operating expenses includes all regular expenses associated with the running of the property. They include scavenger (trash collection), janitorial, maintenance and management services, as well as utilities, fees, service contracts, supplies, taxes, insurance and advertising. The underlying theme to operating expenses is that they are costs involved with the day-to-day operations of the investment.

It is also necessary for the beginning investor to understand the difference between operating expenses and those expenditures for the property that are not operating expenses. Just because you spend money on your property does not make that expenditure an operating expense. Understanding this difference could mean thousands of dollars in additional cash refunds from your tax withholdings.

You must remember that operating expenses do not include mortgage payments and other debt servicing. Not all properties have mortgage lien against them; and mortgages are actually part of the acquisition cost—not the operating cost. The following is a breakdown of typical costs which are considered operating expenses and others that are not.

Operating Expenses

Non-Operating Expenses

Maintenance and janitorial

Acquisition (closing) costs

Repair and decoration

Mortgages and debt servicing

Service contracts

Capital improvements

Supplies

Equipment and fixtures

Scavenger services

Marketing, selling costs

Management fees

Accounting and administrative services

Advertising and leasing services

Insurance premiums

Real estate and corporate taxes

Government fees and licenses

Utilities (paid by owner)

As you can see, capital improvements are separated from operating expenses. Unlike repairs, which serve to maintain the property's current value, capital improvements are additional investments made to the property that will increase its value. For example, building additions, major renovations and installation of a security system are considered capital improvements, because they add to the value of the property. This distinction between repairs and capital improvements becomes very important when income taxes and capital gains come into play.

Accurate identification of operating expenses is important for real estate investors, primarily because the operating expenses are necessary to determine the net operating income. Investors who are investing in real estate for its cash flow and income profits need to examine operating expenses carefully.

Operating expenses are those costs that the investor can reasonably expect during the ownership of the property. A property's income stream and operating profits are improved in one of two ways: increasing revenue or lowering operating expenses. Experienced investors will often focus on the operating expenses—looking for potential reductions and savings—when analyzing a potential cash flow investment.

Another advantage with understanding the difference involves actual dollars and cents you can get through depreciation . The building (though not the land), fixtures and equipment can be depreciated.

Real Estate 101

Real Estate 101

This book makes it easy to not only buy a home, but figure out everything that you need to do, even get a loan. In simple and easy to understand language, it talks about where you should buy a home, what to look for in a home, how to find a home, how to get an agent, how to get a mortgage and more. This is a step by step process that you, a new home buyer, can use to purchase a home.

Get My Free Ebook


Responses

  • amilcare
    Is mortgage part of operating expenses?
    5 months ago
  • Katja
    What is scavenger expense in real estate?
    1 month ago

Post a comment