What Do Landlords Do With Rent Money?

Rent money received by landlords serves as a primary revenue source for operating and maintaining rental properties. While appearing as income, a significant portion covers diverse costs, revealing that being a landlord involves ongoing financial management beyond collecting payments.

Covering Property-Specific Expenses

A substantial portion of rent payments is directed towards the direct costs of the physical property. Mortgage payments, for example, typically include both principal repayment and interest on the loan used to acquire the property. Initially, a larger share of the payment often goes towards interest, gradually shifting towards principal over the loan term.

Property taxes are another mandatory and recurring expense, levied by local governments to fund public services. These taxes are usually based on the property’s assessed value and can vary significantly by location. Landlord insurance is also a necessary cost, protecting the asset against damages, liability, and even loss of rental income. This insurance typically costs between $800 and $3,000 annually for a single-family home and is generally 15% to 25% more expensive than standard homeowners insurance due to increased risks.

Funds are also consistently set aside for routine maintenance and minor repairs. This includes general upkeep such as HVAC servicing, landscaping where applicable, and addressing issues like plumbing leaks or appliance fixes. Various guidelines suggest budgeting for these expenses, such as allocating $1 per square foot annually or 5-8% of the total gross rent.

Funding Operational Costs

Beyond direct property expenses, landlords utilize rent money to cover the various operational costs involved in managing a rental business. Landlords may be responsible for utility payments for common areas or specific utilities like water, sewer, or trash services.

Many landlords opt to hire property management companies, which typically charge a monthly fee ranging from 8% to 12% of the collected rent. These fees compensate for services such as tenant screening, rent collection, maintenance coordination, and administrative tasks. Legal and administrative fees are also incurred, covering expenses like drafting lease agreements, conducting tenant background checks, and accounting services. Tenant screening costs can range from $15 to $75 per applicant, depending on the depth of the check.

Funds are also allocated for marketing vacant units to attract new tenants. This can involve costs for advertising on various platforms, professional photography, or even real estate agent fees, which can amount to half a month’s to a full month’s rent. Vacancy periods themselves represent a significant financial impact, as landlords continue to incur property-specific and operational costs without corresponding rental income.

Building Financial Reserves and Income

After covering immediate and ongoing expenses, landlords strategically allocate remaining rent money towards building financial stability. Capital expenditure reserves are established to fund large, infrequent expenses that extend the property’s useful life, such as roof replacements, HVAC system upgrades, or significant renovations. While there is debate on the exact amount, a common guideline suggests budgeting 8-10% of gross annual rent for capital expenditures, or approximately 1% of the property’s value annually.

Separate emergency funds are also maintained to address unforeseen circumstances or urgent repairs that fall outside routine maintenance, such as a burst pipe or an extended vacancy period. Financial advisors often recommend maintaining an emergency fund equivalent to three to six months of the property’s total expenses, including mortgage, taxes, and insurance. This reserve provides a financial cushion.

Ultimately, after all operational costs, property-specific expenses, and necessary reserves are accounted for, any remaining funds represent the landlord’s personal income or profit from the investment. This final portion reflects the return on investment for managing the property and assuming the associated financial risks.