Chapter 5: The expenses everyone forgets

The one-page "investment summary" stapled to Marcus and Tina's listing claimed $450 a month in cash flow. Chapter 4 computed the honest number: $140 a month flowing the other way. That is a $590 monthly gap, about $7,100 a year, on a small house in a normal market, and nobody lied on the page. The seller's sheet simply left out every expense that arrives on its own schedule instead of monthly. This chapter is the autopsy of that gap, line by line, until the two spreadsheets reconcile to the penny.

The pro forma and the property are different buildings

The seller's pro forma (Chapter 4 defined it: the marketing spreadsheet of projected income) for this house listed rent, the mortgage, and one expense line. Here are both versions of the same month:

The reconciliation, to the penny: start at the seller's $450.00, subtract the $136.50 of vacancy the sheet skipped, the $234.00 of maintenance and capex it skipped, the $145.08 of management it skipped, and the $74.00 by which it understated taxes and insurance, and you land at −$139.58. Four omissions, $589.58, the whole story.

That last $74 deserves its own sentence. The seller's sheet used the current owner's tax bill, $2,304 a year on an old assessment, plus an $888 owner-occupant insurance quote, $266 a month combined. The sale triggers a reassessment in many places (the Home Buying Guide, Chapter 12, covers the mechanics), and a landlord policy costs more than homeowner's coverage. The honest figure for this house is 1.7% of the price per year, $340 a month, and it will drift up from there.

The defense is documents, not suspicion. Before an offer, ask for the current lease, the last twelve months of utility bills, the latest tax statement, and an insurance quote written for a landlord policy rather than a homeowner's one. Sellers are rarely lying so much as describing a perfect year, the one with no empty months and no plumbers. Your spreadsheet's job is to describe a normal year, and normal years contain every line in the table above.

The forgotten lines, one at a time

Vacancy runs 5–8% of rent for a normal house with normal turnover; this guide budgets 7%, about one empty month every 14. Even a great tenant leaves eventually, and the gap between leases is two to four weeks when everything goes right. An eviction or a repaint-and-relist cycle costs months. Schedule vacancy the way you schedule the tax bill, as a certainty whose only unknown is the date.

Maintenance and capex reserves are different expenses wearing the same coveralls, and the distinction matters. Maintenance is the $180 garbage disposal and the $250 plumber visit, small and frequent. Capex (capital expenditures) is the big, slow stuff: the roof is dying a little every single day, and the honest response is to price that decay monthly even though the invoice arrives once every couple of decades. Typical figures for a modest single-family house:

That is $198 a month, about 10% of this house's rent, for capex alone if every system started its life today. Marcus and Tina's inspection showed a five-year-old roof and a newer furnace, so their blended 12% line ($234 a month for maintenance plus capex) is defensible. On a 1960s house with original systems, 15% is the honest number, and "the seller just replaced everything" is the only sentence that justifies less.

Management belongs in the budget at 8–10% of collected rent even if you plan to self-manage forever. Two reasons. First, your time is real: self-managing a single rental runs 50–100 hours a year (Chapter 2 priced this), and a spreadsheet that values your Saturdays at zero is lying to you, not to the IRS. Second, you will eventually hire one, because you move, burn out, or scale, and a deal that only works with free labor is a job, not an investment. Add typical placement fees of half to one month's rent when a manager finds the tenant.

Turnover is the expense hiding inside vacancy's shadow. A tenant leaves every two to three years on average, and each turn costs paint, carpet cleaning or replacement, small repairs, and a leasing fee. Some of it overlaps the vacancy and management lines, but the cash arrives in lumps: a $2,000–$3,500 turn is routine, and the retention lesson follows directly. A $50 rent increase that pushes a good tenant out the door loses more than the raise earns back in its first year.

Insurance and taxes creep even in quiet years. Landlord policies have repriced sharply across much of the country, especially in storm and wildfire states, and deductibles have grown alongside premiums. Property taxes follow assessments upward, and after a sale the assessment follows your own purchase price. Re-shop the policy every year, budget both lines to rise faster than rent, and remember the $74 lesson from the reconciliation: the bill the last owner paid is a floor, never a forecast.

Multifamily extras deserve a flag before Part III: on two-to-four-unit buildings the owner often pays water, sewer, trash, common-area electric, landscaping, and snow removal. Read the actual utility bills before writing an offer. Chapter 11 prices Sofia's fourplex in full.

The 1% rule, autopsied

The 1% rule says a property should rent monthly for at least 1% of its price. It was a fast screen from the early-2010s forums, born when foreclosure-era prices made it easy to pass. The arithmetic in 2026 is short and brutal. Marcus and Tina's $240,000 house would need $2,400 a month to pass; the market rent is $1,950, which is 0.81%. Typical 2026 listings in most metros cluster near 0.8%, so the screen rejects nearly everything, and what it accepts tends to sit in markets rough enough that vacancy and turnover eat the apparent yield.

Here is the part the autopsy usually skips: even passing the screen barely works at today's rates. Run the honest stack on this house at a fantasy $2,400 rent and cash flow comes to about $191 a month, a 3.4% cash-on-cash on $67,200. The rule was calibrated for cheap houses and cheap money, and neither is on the menu. Use rent-to-price as a sorting tool when scanning fifty listings, and never as a verdict.

The deeper problem with any single-ratio screen is that it hides the expense stack entirely. Two houses can both rent at 0.85% of price while one has a new roof, low taxes, and tenants who stay five years, and the other has original 1970s systems in a county that reassesses aggressively. The ratio scores them identically; the next decade will not. Screens save time, and the honest spreadsheet decides. That order, screen first and spreadsheet second, is the entire method of this guide.

The 50% rule, the 30-second lie detector

The 50% rule says that over time, operating expenses excluding the mortgage run about half of rent. It remains a genuinely useful first pass. On this house: half of $1,950 is $975 of estimated monthly NOI, minus the $1,234 payment leaves −$259 a month. The detailed honest stack says −$140. The two methods disagree on degree and agree on direction: thin to negative.

The rule's best use is smelling fraud fast. The seller's pro forma claimed $266 of monthly expenses, which is 13.6% of rent. Houses do not run on 13.6%. When a listing's implied expense ratio is under about 35%, you are not looking at an efficient property; you are looking at missing lines.

Ray's year that ate itself

A paid-off house lost $6,550 in twelve months, a $17,000 swing from its normal year. Add a mortgage and the hole deepens by a year of debt service. None of these events was rare; they were all on the capex clock and the turnover clock. What made Ray's bad year a story instead of a sale was six months of reserves, parked and boring, exactly as Chapter 3 prescribed. The expense stack is not pessimism. It is the entrance fee for staying in the game long enough for the four returns to pay you.

Key takeaways

• The seller's $450 a month and the honest −$140 a month reconcile exactly: skipped vacancy ($136.50), skipped maintenance and capex ($234.00), skipped management ($145.08), and a $74.00 tax-and-insurance lowball.
• Capex is a daily expense with a delayed invoice: roughly $2,380 a year ($198 a month) in scheduled replacements on a modest house, even before anything breaks early.
• Budget management at 8–10% even if you self-manage; a deal that needs your free labor to pencil is a job. Price turnover too: one move-out every 2–3 years, $2,000–$3,500 a turn.
• The 1% rule is a 2012 artifact: this house would need $2,400 of rent and gets $1,950 (0.81%), and even passing it yields only about 3.4% cash-on-cash at 2026 rates. The 50% rule survives as a lie detector: any listing claiming expenses far below half of rent is missing lines.
• Ray's paid-off house lost $6,550 in one ordinary-bad year. Reserves, not optimism, are what carry a rental between good years.

Sources: IRS Publication 527: Residential Rental Property · Finvest Home Buying Guide