Investment Property Costs: Add these real estate expenses to your investment property budget
The following is an edited excerpt from my new book, Buy, Close, Move In!, which was published this month by HarperCollins.
In general, the costs of buying and owning investment real estate are similar to those of buying and owning a primary residence. You don’t want to skimp here just because you’re not planning on living in the property.
First, if your tenants are unhappy, you’ll be unhappy because they’ll be constantly calling you to fix things. Second, life can change at the drop of a hat. You might wind up living in this property at some point in time.
Before you buy, you’ll want to make sure you know about any potentially costly problems with the property – for the sake of your tenants and your wallet. To do this, hire a professional home inspector who specializes in the type of property you’re buying.
(A professional home inspector will work for a condo, a townhome, a single-family house, or even a small building with four to ten rental units. For something larger, you may want to hire a commercial building inspector or someone with experience inspecting commercial or industrial buildings.) You should expect to pay at least $400, depending on the size and complexity of the inspection.
Keep in mind, the bigger the property, the most expensive the problems. In some cases, it’s just that smaller problems are replicated over four or more units, and wind up costing a lot of cash up front to fix.
In addition to spotting potentially expensive problems and factoring in any necessary adjustments before you purchase the property, you also have to figure out a budget for ongoing maintenance. Will you paint the walls each time a new tenant moves in? Will you clean the carpet? Will you polish the floors?
If the property is large enough, you may want to hire someone to be the building caretaker or manager, which is another expense. This person would ideally live on-site or in the neighborhood, so he or she can be on hand to take care of those pesky 3 a.m. calls to fix a clogged toilet.
Here is a list of potential expenses you may encounter when you buy and own rental property: Mortgage and real estate taxes; property and umbrella liability insurance premiums; homeowners association fees, co-op assessments, monthly maintenance fees; utilities; repairs to and maintenance of the exterior and interior of the property; landscaping; special taxes and fees; repairs to get the unit in rentable condition; and, the X factor.
The “X factor” is a line item in your investment property budget for the unknown – and something always pops up. Some investors use a percentage (such as 2 percent or 5 percent of the maintenance budget) and some just add in a fixed cost (such as $1,000 or $5,000), depending on the size of the maintenance budget. The X factor covers issues such as having to place a furnace or hot water heater.
As you grown and learn as a real estate investors, you’ll develop your own formula for success. But you’ll always have to watch your expenses. When it comes to owning investment real estate, every time you spend money, it’s coming out of your own pocket, so finding better and cheaper ways to maintain your property will benefit you in the long run.