Capital Costs

Let us say that you bought your modest place in the sun for $240,000, including purchase costs. If you bought a 6 or 7 bed 'palace' with all the bells and whistles the calculations will be the same, but the numbers will be very different.

You may set up a mortgage for part of this sum. In my example, we will assume a 50% mortgage, but you can put in your own numbers. Let us say you pay 7%. This is probably a bit optimistic for an overseas buyer of rental home, but a bit pessimistic for a US resident buying the same property. Let us also say that the part of the purchase price that you paid up front from savings would have earned 3% if we had not tied it up in your new home. So every year you are paying 7% of $120,000 ($8,400) to the mortgage company, and losing 3% of $120,000 ($3,600) from the capital you put in. This totals $12,000 a year, which will be added to your running costs in the next section.

Running Costs

If you already own your rental home, your annual running costs should be easy to calculate, as all of these costs should appear somewhere on your bank statements. I have set out a typical set of costs here for the benefit of would-be owners who haven't yet bought their rental home. If you have your own established rental home then you will have more accurate real figures that you can put in place of mine.

One major running cost is not included in the list. This is the cost of end-of-rental cleans. Since this is a cost that is directly dependent on the number and pattern of your rentals, it is included below as a deduction from income.

All of the other costs are more or less fixed irrespective of how many rental bookings you take. In particular, do not underestimate the cost of major replacements, refurnishing, pool upgrading, etc. It is easy to be complacent if everything runs smoothly for a year or two, but these costs WILL appear at some stage! Even if you do not have a real tangible reserve fund, you still need to include it in your calculations if you want a realistic picture of how your investment is performing.