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Becoming A Landlord – What Should You Include In Your Budget?
While landlords continue to benefit from high levels of private demand in light of sky-high property prices, there’s no doubt that those who operate individually can find it harder to achieve a sustainable profit than organizations.
One of the main reasons for this is that 43% of landlords own just one rental property, with this representing some 20% of tenancies.
Of course, owning just a single property can be challenging due to many of the different costs and factors involved. But what are the key considerations that you should factor into your budget?
1. The Mandatory Requirements
Let’s start with the basics; as your first step should be to budget for the mandatory requirements that you’ll have to address as a landlord.
For example, you’ll need to fund a number of checks and inspections each year, in order to ensure that the property is safe and liveable.
For example, you’ll have to ensure that gas and electrical safety checks are carried out by qualified tradespeople, while you also have to inspect any appliances that you left installed on the property.
EPC checks are also required to evaluate a property’s energy efficiency and performance, based on factors such as insulation and how much it costs to heat the interior. Similarly, you’ll need qualified electricians to check all smoke and carbon monoxide alarms installed within the property, as these must remain functional at all times.
2. Circumstantial Costs
As a landlord, you’ll also have to consider various circumstantial costs, each of which helps you to manage your property and provide a financial safeguard in the event of your property being damaged or vandalized.
One of the most apparent circumstantial costs is lettings agency fees, which you’ll need to pay when listing your property for rent. If you also want an agency to manage your property and tenancy agreements, you’ll also have to pay a premium for this service.
While it may be considered an additional cost, we’d argue that landlord insurance is an incredibly important expense.
In fact, this should be seen as an investment, as it protects your property and provides coverage in the event of structural damage being incurred.
3. Are There Any Other Potential Costs
Before we go, it’s important to consider any other costs that may be required when owning property as a private landlord.
For example, if you don’t employ the services of a property maintenance firm, you’ll be physically and financially liable for all maintenance and repairs carried out at the properties that you own.
You may also have to cover the cost of utilities (depending on the nature of your tenants and individual contracts), so this may need to be incorporated into your budget.
In between tenancy agreements, you may have to redecorate your properties and have them professionally cleaned. This will depend in part of the state property is in at the end of the previous tenancy, but some level of cleaning and refurbishment may be required as a matter of course.
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Arnab Dey
Arnab is a professional blogger, having an enormous interest in writing blogs and other jones of calligraphies. In terms of his professional commitments, He carries out sharing sentient blogs.
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Furthermore, once the company identifies an inventory that it's unable to sell, it writes it down as an official recognition of the loss. Business managers of an organization use these data from previous years' inventory information. Hence, based on this, they make a judgment and decide on the size of the inventory reserve. What Is The Use Of An Inventory Reserve In Accounting? In general, businesses want to get an accurate picture of their inventory position. Hence, they try to estimate the amount of inventory that is not to be sold from the end of the company. This inventory which the company has written off is called the inventory reserve of the company. The accountant includes this data in the balance sheet. According to NetSuite.com, “Companies own raw materials, partially completed products, and finished goods. These items are all included in a company’s gross inventory. Business managers know that not all of their raw materials will be used, and not all of their finished goods will be sold. That reserve is deducted from the value of gross inventories to arrive at the company’s net inventory position. Net inventory is typically what appears on a company’s balance sheet.” During the accounting process, the business considers its inventory reserve as a “contra” asset in its balance sheet. This is because this amount actually reduces the gross inventory value to arrive at the company’s net inventory value. Since inventory accounts come naturally with a debit balance, as debit increases in the balance sheet, the inventory account value increases. On the other hand, inventory reserves, like contra-asset accounts, come with natural credit balances. Hence, the latter serves to reduce the value of the assets. How Does An Inventory Reserve Work? Indeed.com explains – “An inventory reserve in accounting is an entry on a business's balance sheet that anticipates the company's unsold inventory. Accountants consider inventory as an asset on their balance sheet. An asset is any item or resource that a company owns and has the potential to generate economic value, such as revenue.” Inventory also falls under this asset category. Also, as per the need for good accounting principles, businesses need to report their assets in such a way that they are close to their actual value. Hence, if a business wants to calculate the net value of its inventory, it needs to account for the loss of inventory and make it an estimate. As per Generally Accepted Accounting Principles (GAAP), an inventory reserve is a part of inventory accounting. If a business wants to track its inventory reserve, it will thus be able to make an accurate representation of its assets on the balance sheet. The usefulness of an asset is only when it has a future value to the business. There is always a part of the inventory of a company that remains unsold every year. Hence, the company decides not to include the entire inventory amount as an asset on the balance sheet. To create an accurate value, the company subtracts the inventory contra asset account value from the inventory asset entry. The resulting value is the estimate that the company will sell to create value for the business. If the company does not include the inventory reserve entry, the company will end up overstating the value of its assets. Accounting For Inventory Reserves: Special Considerations According to GAAP standards (which is the industry standard for accounting), inventory reserve is a conservative methodology for entry. This is because the company's attempt, in this case, is to predict the losses for the inventory even before the company has confirmed the loss. In general, inventories consist of goods with future value for the company. Hence, these goods are called assets. However, according to conservative accounting principles, it is important to report assets close to their current value. Hence, it gets easier for the company to make estimations. Summing Up Hope this article was helpful for you in getting a better understanding of how an inventory reserve works with accounting. You can see from here that it is important for the company to consider inventory reserve as a contra asset. This helps the company to get an accurate representation of the assets that it will sell in the future. Do you have more information to add regarding inventory reserve? Consider sharing with us in the comments section below. Enrich Youself With More Financial Article By Clicking Below!! Equity Theory: A Balancing Act for Modern Workplaces Supply Chain Risk Management: Effective Strategies To Reduce It What Is A Distribution Channel? 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