• Overhead (business overhead) refers to all ongoing expenses needed to run your business that aren’t directly tied to making money, such as rent, insurance, and staff salaries.
• Overhead is categorized as either fixed costs (stay the same every month) or variable costs (change based on business activity).
• Real estate businesses need larger cash reserves because essential expenses continue even during property vacancies or sales slowdowns.
• Most legitimate overhead expenses qualify as tax deductions, with real estate investors benefiting from additional deductions like depreciation.
• Regular overhead reviews help catch problems early and identify opportunities to convert fixed costs to more flexible variable expenses.

Business overhead includes all the expenses you must pay to keep your business running, even when you’re currently not turning a profit. These costs don’t directly create revenue, but your business can’t operate without them.

A good way to think of overhead is like the foundation of a house. You don’t live in it, but without it, the whole house would collapse. Similarly, overhead expenses don’t directly bring in money, but they provide the structure that makes earning money possible.

How Overhead Works in Real Estate

In real estate, overhead expenses continue whether you’re making sales or not. For example, you still need to pay:

• Office rent
• Staff salaries for receptionists and administrators
• Marketing materials and advertising
• Technology costs like computers and software
• Insurance premiums
• Utilities and internet service

The challenging part about overhead is that these bills come due every month, even during slow periods when little or no money is coming in. A real estate office must pay rent, staff, and keep the lights on whether they sell ten houses this month or none.

This is why managing overhead carefully is so important in real estate. Having too much overhead can quickly drain your finances during market slowdowns, while keeping overhead reasonable helps your business survive tough times and thrive during good ones.

Overhead comes in two main types: fixed and variable. Fixed overhead stays the same regardless of business activity, while variable overhead changes with business volume.

Fixed Overhead

Fixed overhead expenses are bills that stay the same every month, even when business slows down.

For most real estate businesses, rent is the biggest fixed expense. This creates stability since you know exactly what you’ll pay, but it also creates pressure because you must pay the same amount whether business is good or bad. When the market slows down, your rent payment doesn’t get smaller.

Other fixed expenses include:

• Insurance premiums that stay the same until your policy renews
• Staff salaries that continue regardless of how many sales you make
• Software subscriptions that charge the same monthly fee even when you use them less

These unchanging expenses make budgeting easier since you know what to expect. However, they make your business vulnerable during slow markets. For example, a real estate office with $15,000 in fixed monthly expenses needs to earn at least that amount before making any profit.

This is why many real estate businesses fail during long market slowdowns, since they run out of savings before business picks up again.

Variable Overhead

Variable overhead changes based on how busy your business is, making it more flexible than fixed costs. When business picks up, these expenses typically rise. Conversely, when business slows down, they naturally fall.

For example, during busy seasons:

• Utility bills increase as more people use the office
• You use more office supplies and marketing materials
• Advertising costs often increase to take advantage of the busy market
• Travel expenses go up with more property showings
• You might hire temporary help to manage the workload
• You might spend more on client gifts and events
• Equipment gets used more and needs more maintenance

The good thing about variable expenses is they create a financial safety net during market changes. When income drops, many of these expenses automatically decrease without you having to do anything. However, during busy times, these costs can easily get out of control if you don’t watch them carefully.

Figuring out your exact overhead costs helps you make smart decisions about pricing, hiring, and growing your business. Here’s how to calculate your overhead costs in simple steps:

Step 1: Find All Your Expenses

Start by looking through your financial statements to identify every expense your business has. Many real estate businesses forget to include expenses that don’t happen every month, like:

• Annual membership dues
• Quarterly software payments
• Yearly insurance premiums
• License renewal fees

If you pay something once a year, divide it by 12 to find the monthly cost.

Step 2: Sort Your Expenses

Once you have your complete list, divide your expenses into two groups:

• Fixed costs (stay the same regardless of business activity)
• Variable costs (change based on how busy you are)

This sorting helps you understand which costs will continue even during slow periods and which will naturally decrease.

Step 3: Calculate Your Monthly Total

Add up all your expenses to find your total monthly overhead. This is the amount you need to earn just to break even before making any profit.

Step 4: Find Your Cost Per Deal

This critical step shows how much overhead cost is built into each transaction you complete. Use this simple formula:

Overhead Rate = Total Monthly Overhead ÷ Number of Transactions

For example, if your real estate business has $10,000 in monthly overhead and typically completes 10 transactions per month, each transaction carries $1,000 in overhead costs.

This figure is important because it helps you determine:

• The minimum commission you need to charge
• The lowest rental rate you can accept
• How many deals you need to complete to be profitable

Step 5: Track Changes Over Time

Don’t just calculate your overhead once and forget about it. It’s a good idea to calculate your overhead regularly, preferably every quarter, and compare current numbers with past performance.

Many financial advisors also recommend finding a benchmark for healthy overhead levels so you can spot concerning trends before they become serious problems.

Real estate has special overhead challenges that other businesses don’t face. Unlike retail or manufacturing, real estate income often comes in large but irregular amounts (like commissions) or monthly rental payments that can stop if tenants leave. At the same time, many real estate expenses continue every month, whether you’re making money or not.

Investor-Specific Overhead

When you own investment properties, several expenses continue even when your property sits empty:

Property Ownership Costs

• Property taxes must be paid whether you have tenants or not
• Insurance continues regardless of occupancy
• HOA or condo fees have fixed deadlines that don’t change if your unit is vacant

Business Operation Costs

If you offer property management services or manage properties for others, many states require you to have a real estate/property manager license. This naturally comes with licensing and ongoing education fees.

Technology Expenses

Modern real estate investing requires various software and tech services:

• Property management software
• Accounting systems
• Marketing websites and services

These subscriptions bill you monthly whether your properties are full or empty.

RELATED: Real Estate Basics: How Rental Properties Make Money

Financing Expenses

For most investors, mortgage payments are the biggest monthly expense. These payments:

• Continue whether your property is occupied or vacant
• Usually can’t be paused during difficult times
• Are directly affected by interest rates, making your loan terms extremely important

This explains why having cash reserves is so important for real estate investors. Your property might be empty for a month or two, but your expenses will continue during that time, putting pressure on your finances until you find new tenants.

Property Management Overhead

If you hire a property manager, understanding their costs helps you evaluate their fees and services.

Property management companies have their own overhead expenses:

• Software systems to track properties, tenants, and maintenance
• Office staff who coordinate maintenance and handle leasing
• Emergency response systems for after-hours problems
• Vehicles and gas for property inspections
• Tenant screening services and background checks
• Banking fees for handling security deposits and rent payments
• Professional liability insurance to protect against lawsuits

Most property management companies charge between 8-12% of the monthly rent. This fee structure works in your favor because:

• You only pay when the property is generating income
• This turns what would be a fixed expense (if you managed yourself) into a variable expense
• The fee automatically adjusts based on your property’s performance

For investors, the big question is whether self-management or professional management makes more financial sense. Understanding these overhead costs helps you make that decision based on your specific situation, skills, and time availability.

Understanding which expenses you can deduct and how to document them properly can save you thousands of dollars while keeping you safe from IRS problems.

What Overhead Expenses Can You Deduct?

Most legitimate business overhead expenses can be deducted from your taxes, which directly lowers your taxable income. For real estate investors, these deductible expenses include:

Property-Related Expenses

• Property taxes
• Insurance premiums
• Mortgage interest (not the principal portion of payments)
• Maintenance and repair costs
• Property management fees

Business Operation Expenses

• Legal fees
• Accounting and bookkeeping services
• Software subscriptions for property management
• Computer equipment and office supplies
• Marketing and advertising costs
• Travel expenses related to managing your properties
• Educational expenses to improve your real estate knowledge

Special Real Estate Tax Benefits

Real estate investors get special tax advantages that other businesses don’t. The biggest one is depreciation. Even though buildings typically gain value over time, the IRS lets you deduct a portion of the building’s cost each year as if it were wearing out.

Depreciation is powerful because:

• It’s a “paper expense” (you don’t actually pay it out of pocket)
• It reduces your taxable income without affecting your cash flow
• Residential properties can be depreciated over 27.5 years
• Commercial properties can be depreciated over 39 years

Here’s a depreciation calculator for real estate:

Another major tax benefit came from the 2017 Tax Cuts and Jobs Act. This law created the Qualified Business Income Deduction (Section 199A), which allows many real estate investors to deduct up to 20% of their business income.

Home Office Deduction

If you run your real estate business from home, you may be able to deduct home office expenses. There are strict rules, however.

You must have a space in your home used EXCLUSIVELY for business. This means the space cannot be used for anything else. A desk in your living room doesn’t qualify, but a spare bedroom used only as an office would.

Two Ways to Calculate the Deduction

1. Simplified Method:
   • Deduct $5 per square foot of office space
   • Maximum of 300 square feet ($1,500 maximum deduction)
   • Easy to calculate with minimal paperwork
   • Best for smaller spaces or lower-cost housing areas
2. Actual Expense Method:
   • Calculate what percentage of your home is used for business
   • Apply that percentage to eligible home expenses, including:
     • Mortgage interest or rent
     • Property taxes
     • Home insurance
     • Utilities (electricity, water, internet)
     • Maintenance and repairs
     • Depreciation on the business portion of your home
   • Requires more record-keeping but usually results in a larger deduction
   • Better for larger home offices or expensive housing areas

How do overhead expenses differ from operating expenses?

Overhead expenses are costs that keep your business running but don’t directly create income. Operating expenses include both overhead costs AND direct costs that help generate revenue.

For example, if you own rental properties:

• Property taxes and insurance are overhead expenses because you pay them whether your property is occupied or not
• Tenant screening costs are operating expenses (but not overhead) because they directly help you generate rental income
• Marketing to find new tenants is an operating expense (but not overhead) because it directly connects to earning rent

Understanding this difference helps you plan better. Overhead expenses need to be covered even during slow periods, while some operating expenses naturally decrease when business slows down.

Can business overhead ever be considered an investment rather than an expense?

Yes! Some overhead expenses are actually investments in your future success, even though they appear as regular expenses on your financial statements.

Examples include:

• Technology systems that make your business more efficient
• Marketing that builds your brand reputation
• Training programs that improve your team’s skills

What makes these expenses investments rather than just costs? They create value that lasts beyond the current time period. A regular expense just maintains your business, while an investment builds your capacity to earn more in the future.

Start by identifying which overhead expenses are actually strategic investments and protect these during cost-cutting efforts. Cutting these “investment expenses” might save money in the short term but hurt your business in the long run.

How should seasonal real estate businesses handle overhead during slow periods?

Seasonal real estate businesses need special strategies to manage overhead during their slow seasons. Here are effective approaches:

1. Negotiate seasonal payment structures with vendors Ask service providers if you can pay more during busy seasons and less during slow periods, keeping the same annual total
2. Build a cash reserve during busy times Set aside extra money during your peak season to cover overhead costs during slow months
3. Convert fixed costs to variable when possible Look for ways to pay for services only when you need them, rather than year-round
4. Develop off-season income streams Find ways to generate some income during slow periods, like offering special rates to different types of guests
5. Schedule renovations during slow periods Plan major work during your off-season when it won’t disrupt paying guests

Many vacation rental owners keep a small year-round team for essential maintenance and add seasonal workers during busy periods. This approach lets your staffing costs adjust naturally with your income levels.

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