Nov
06

Real Estate Investing Mistakes – 5 Expenses to Include in Your Property Analysis

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Ryan Lewis asked: Positive cash flow means that you have money left over after you’ve collected the rent, paid the mortgage, taxes and utility bills right? That’s the common misconception for first-time real estate investors. The reason it’s a misconception is because the true cost of owning a rental property includes many additional expenses that are often overlooked. Insurance This may be the most obvious monthly expense but one that is regularly missed in the initial analysis. Buying insurance on your property is a must, especially since you are generally allowing strangers to live in your huge investment. Depending on what type of property you own and where you are located, you can expect to pay between $25 and $75 per month for an average property. To make a general calculation, I usually use 0.02% of the total purchase price for the monthly cost; which will work for standard rental homes. Condo Fees A $100,000 condo with rental income of $1,000 per month and PIT (Payment, Interest and Taxes) of $800 looks great until you add that small $300 per month condo fee! Make sure you know EXACTLY what the condo fees will be before you buy the property. This also means that you should check the reserve fund and any recent decisions made by the condo board. Vacancy Now we’re getting into the expenses that don’t show up as a monthly withdrawal but will knock a dent in your dreams of early retirement. The first question is: do you know the vacancy rate in your area? To get these numbers check with local realtors, business groups and even other landlords. If you’re confident that you will have not trouble renting the unit, I’d suggest you still leave at least 5% (approximately two weeks) as a minimum and include it as a monthly expense. This does not mean that you write it down; it means that you keep it in the bank! Once you have the equivalent of about 1 month’s rent saved, then you can consider other uses for the money. Maintenance Here is yet another expense that thrives on Murphy’s Law. If you are diligent and keep an ongoing account for maintenance and repairs, you’ll probably rarely need to use your reserve; however, if you do not plan ahead there’s a good chance all the appliances will break in the same week! The maintenance fund is a crucial part of your real estate management strategy. I would suggest you put aside between 2% and 8% of the monthly rent depending on the age and condition of your property. As this reserve fund grows you can feel more secure and not need to pay high interest when the roof needs repair or the bathtub goes. Management Fees I leave management fees to the end because this seems to be the least likely expense people are willing to set aside. The common reaction is, “I manage the property myself, why would I need to set money aside for management?” My reply is based on the theory of duplication. If you are planning to start a real estate empire (and not end with just one property) then you will need to have good quality managers running your buildings. If you only have a positive cash flow without factoring in any real estate management expense, then your plans better include carrying costs as your portfolio grows. Based on my experience, management of single or smaller units will run about 10% of the monthly rent; dropping to 5% or less as the buildings increase in size and value. Final Thoughts The list of property expenses above means that, as a good rule of thumb, you should include a premium of between 10% and 20% of the total expected rent for non-PIT costs. While this may seem like an extremely high number at first, a solid property that will give a continuous monthly cash flow will almost always support this adjustment. Scottsdale Real Estate Market
 

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