Most real estate investors invest for one main reason – making money. And there’s only one way to know if you are.
You track your efforts. You calculate your return on investment (ROI).
To do so, you’ll want to track how much money has gone in and how much have you gotten back.
If you have a surplus, you’re making money. It’s a little more complex than that but that is the overall concept.
Now, that means you need to track your efforts.
“What gets measured, gets managed.” – Peter Drucker
Most problems stem from getting these numbers wrong.
In today’s article, we’ll look at some of the mistakes real estate investors often make when budgeting for their investment property – and what you can do to avoid them.
1. Forgetting to factor in vacancies.
This is one mistake that far too many investors make. Your rental property will not always be fully occupied. For that reason, you should account for it.
There are times that you’ll go for a month, or even a few months for that matter, without getting a tenant. Especially if you are doing it on your own.
So, when budgeting your property, keep this in mind.
Now, what exactly should you budget for?
Well, when you have a vacancy at your property, there are bills you must pay. These can range from increased council tax to emergency repairs and maintenance.
That said, rental markets sometimes do differ. Hot markets will usually have low rates of vacancies. That’s why it’s always advisable to research the location prior to buying an investment property. It can make all the difference.
2. Disregarding exit costs.
Equity is a simple concept, yet it’s often misunderstood by many people.
Here’s an example:
Suppose your Centennial, Colorado investment property is valued at $300,000 and owe your bank $180,000. How much equity would you have?
If you are thinking its $120,000, you are dead wrong!
That figure is only an illusion. It only exists on paper. Your equity is actually less than that.
So, how much equity could you really have? Sure, your asset is worth $300,000 and owe the bank $180,000. However, what many forget to factor in their calculations are the costs of cashing out and liquidation.
In many cases, these costs can rack up to around 10%. This is still a conservative figure, as you haven’t factored in other things like carrying costs during property marketing.
What’s now left is what you can really claim to be your equity.
3. Not budgeting for property management.
Property ownership and property management are two different things. Anyone can become a property owner, but not anyone can become a property manager. Being a landlord is more than just collecting rent at the end of the month.
As a landlord, you’ll be responsible for many things. You’ll be responsible for finding and screening prospective tenants. You’ll be responsible for ensuring the property is in good state of repair and maintenance. You’ll also be responsible for enforcing the terms of the lease.
In addition, you’ll be required to know all federal, state and local laws regarding the landlord-tenant relationship. Another important point to take note of is to ask your property manager if the area you're investing in is somewhere they would recommend.
When all is said and done, being a landlord isn’t an easy walk in the park. If you have the experience and industry knowledge, then good for you! However, if you are unsure, then it may be in your best interest to hire a professional.
The right property management company will not only help you capitalize, but they will help you run your property like a successful business. Just remember to pick the right one, as not all property management companies are created equal.
4. Not budgeting for unexpected repairs.
This is yet another thing that many real estate investors in Centennial, CO fail to budget for. And oftentimes, it doesn’t end well for them.
You might hear a newbie landlord say something along the lines of: “Well, that furnace repair really did throw off my returns this year. But I’ll make it up next year!”
Then next year comes. Only this time it’s something else. The rear fence may need replacing. The kitchen may need some updating. Or, the roof may need a repair.
As such, repairs and maintenance are an inevitable expense. They will occur sooner or later. Therefore, as you budget your property, make sure you take repairs and maintenance into account as well.
Generally, the older your home is, the more you should allocate in your budget for repairs.
In most cases, these costs can be as much as 8% or your rental income per year. Of course, it’s disappointing when such bills come knocking. On the bright side, preventative maintenance is your best bet.
5. Forgetting about regular maintenance.
This is another area that many newbie investors fail to understand. Now, repairs and maintenance are two different things. Put simply, a repair is a capital-intensive upgrade.
Every part of your property has a lifespan and will need upgrading or replacing after some time.
Maintenance, on the other hand, has more to do with how your tenants use of the property. Maintenance costs hit hardest during tenant turnovers.
The typical maintenance costs are recarpeting and repainting, or whatever needs to be done to bring your property back to the rent-ready state. Thankfully, this is something that you’ll only have to do when tenants move out.
The bad news, however, is that the costs can quickly add up. That’s why it’s important to do all you can to keep your tenant turnover rate low.
A budget of around 5% usually suffices for maintenance.
See Our: Maintenance Tips Article
6. Failing to budget for miscellaneous costs.
As a landlord, you’ll run into a slew of trivial costs. However, when combined, these trivial costs can quickly add up to something significant.
Many active Centennial real estate investors usually spend a significant amount of time in their cars:
- Visiting their own properties
- Touring properties for sale
- Scoping out new markets
- Visiting auctions
While you may not notice it, that mileage can quickly add up, both in terms of fuel consumption and the wear and tear on your vehicle.
Administrative costs are other things to budget for. A budget of around 3% is usually enough to cater for these costs.
As a real estate investor in Centennial, these are the 6 main mistakes to avoid when budgeting your property. Avoid them by truly taking them into account.