How to build an annual operating budget for a rental property
Start from the last twelve months of actuals, then change each line for what you know will be different: rents, vacancy, tax, insurance and repairs. Put reserves and loan payments below net operating income. One property's budget fits on a page and tells you in advance whether the year will pay for itself.
Start with last year, not a blank page
The most reliable budget begins with what actually happened. Pull the trailing twelve month statement for the property, with income and expenses by month. If you bought recently and have no history, use the seller's T12 and check it against bank statements.
Then add a column for the new year. Each line gets a number and a reason. A line with a reason is easy to question later, and a line with only a guess is not.
Income: rent, vacancy and other income
- Gross potential rent: every unit at its rent, for twelve months, using the rent roll. Add scheduled increases at the date each lease renews.
- Vacancy and credit loss: estimate from your own history. If a unit sat empty for two months last year, plan for something similar.
- Other income: laundry, parking, pet rent, late fees and utility reimbursements. Budget the ones you can count on and leave out one-time income.
IRS Publication 527 is a useful list of what counts as rental income, including items people forget such as lease cancellation payments and advance rent.
Expenses: fixed, variable and planned
Split the expenses into groups, because each is budgeted differently.
- Fixed: property tax, insurance, loan interest. Use the actual bills or the new assessment, plus expected increases. Ask your agent for the renewal quote before you finalize.
- Semi-variable: utilities, trash, landscaping, management. Use last year plus a realistic increase.
- Variable: repairs and turnover. Use a per-unit amount from your history, as in the yearly maintenance budget per unit.
List any planned project separately. A roof replacement, new boiler or repaving is not a normal operating cost. Handle it through reserves or a specific plan.
A worked example
Example a made-up 10-unit building. Gross potential rent is $120,000. Vacancy is budgeted at 5%, which is $6,000. Operating expenses are $42,000. Reserves are $6,000. Loan payments are $60,000.
| Line | Yearly budget |
|---|---|
| Gross potential rent | $120,000 |
| Vacancy (5%) | -$6,000 |
| Effective gross income | $114,000 |
| Operating expenses | -$42,000 |
| Net operating income | $72,000 |
| Reserves | -$6,000 |
| Loan payments (principal and interest) | -$60,000 |
| Cash flow after reserves | $6,000 |
In this made-up year the building clears its bills with $6,000 to spare. If vacancy doubled to 10%, income would fall by another $6,000 and cash flow would be zero. That is the kind of question a budget answers early. You can also compute your break-even occupancy from the same numbers.
Spread it across the months
A yearly total hides cash crunches. Insurance may be due in one payment and property tax in two, as in recording a property tax payment. Put each large bill in the month it is due and check that the account holds enough before then.
Review the budget every month: compare actual to budget for each line, write why a line is off, and adjust the rest of the year only when the reason will continue. A line that is far off for three months in a row is a sign the budget was wrong, not a surprise.
How DoorKeeping handles it
Set each property's budget in the app, then ask Claude or ChatGPT through DoorKeeping for budget against actual for any month, with a forecast for the year. Actuals come from approved, categorized transactions, so the comparison uses the same books as your Schedule E report. Each property has its own budget, which keeps one LLC's numbers apart from another's.
Sources
Questions
- How do I budget for a rental property?
- Start from the last twelve months of actual income and expenses, adjust each line for known changes, and add reserves and loan payments.
- How much vacancy should I budget?
- Use your own history first. If you have none, ask local owners or a lender what they assume, and say so in the budget.
- Should reserves be in the operating budget?
- Keep them on their own line below net operating income, so they do not distort expense ratios.
- How often should I compare budget to actual?
- Monthly, as part of the month-end close.