5 Mistakes Real Estate Investors Make When Budgeting for Their Property
Here are 5 mistakes to look out for when budgeting your property
By Faraaz Hashmi
Rental properties are businesses that you can derive incredible income from. However, let’s not discount the fact that there are also potential losses if you fail to consider your budget. Just like any asset, your real estate investment should be taken care of to provide an increased value over time. Real estate investors have to be realistic in budgeting for costs associated with rental properties’ management.
Most investors just have one purpose — to earn money. And in order to be successful, we need to track our activities and efforts, along with the figures we are getting. So what’s the primary reason of real estate investors’ loss or in the worst case scenario—bankruptcy? Proper management of income is very crucial for every business out there, because getting these numbers wrong will be the root of more mistakes.
With our experience in property management, we were able to come up with a few mistakes to watch out for and address in Orange County, California:
1. Not budgeting for unexpected repair costs
Repairs are inevitable; therefore, you need to create a budget for repair costs. Allocate a small percentage of the annual rental income for repairs, so when it’s time for emergency fixes, you can take from this part of your budget. If you fail to set up a budget, you might frequently be scrambling around for extra cash. The worst-case scenario involves having to dip into your personal savings.
There are a few repairs that may arise in your rental unit:
You may need quickly address a kitchen plumbing problem to avoid flooding from the kitchen sink. Faucet leaks and busted pipes might cause undue damage to the kitchen area.
Furnace problems might provide less heating to the property, which can be a hassle for your tenants during winter.
A broken tank or overflowing pipe must be fixed right away.
Circuit breakers can trip and result in power outages. You might need to contract an electrician’s services.
Broken appliances, damaged flooring, peeling paint, and roof holes and leaks might cause major inconveniences to your tenants.
Missing pickets need to be fixed to retain the attractiveness of your property.
Cracks and gaps in the garage door might be troublesome for the inhabitants of your unit.
2. Not accounting for property management costs
Owning a rental property requires in Orange County and other areas taking on heavy responsibilities, as you need to attract tenants and conduct screening. You need to attend to repairs and maintenance and be well-versed in the local and state laws. As such, there are many advantages to hiring a property management company that will help you manage these stressors.
You must carefully select the property manager that will handle your property. Be aware of the fees they charge and the extent of services they provide with each corresponding cost. Here are a few fees that could be incurred with hiring a property manager:
Monthly management fee
Different property managers have different fee structures. Some charge a flat rate per month depending on your property size and expected services. Others will charge based on a percentage of the gross monthly income. This percentage might be lower if they’re managing commercial properties compared to residential units.
Tenant placement fee
Some property managers charge a separate fee for tenant placement. This might go to advertising expenses and screening procedures.
When you have a vacant unit, a property manager might charge you a flat rate each month or a one-time monthly rental payment to spend for tenant searches.
Depending on the property manager, some might charge this fee to conduct regular maintenance for common areas. In lieu of the maintenance fee, a reserve repair fund might be needed. This is a budget for specific repairs that need to be fixed immediately.
There may be eviction fees associated with using the services of a property management company for evicting a tenant. This is to pay for court expenses.
Early termination fee
Breaking your contract early with a property management company may require you to pay an early termination fee. You might only be charged for a month’s rental; the company’s policies will determine the additional fees you will need to pay.
3. Not calculating for vacancy expenses
A vacant unit can be costly to manage, but sometimes this can’t be prevented. For example, a tenant may terminate the lease early or may not renew their lease. There are many expenses you have to consider even when the property is vacant:
You still have to make the mortgage payment when the property is vacant. If you don’t have other sources of income to deduct this cost from, it might become a stressful situation.
You are obligated to pay taxes whether or not someone is renting your property.
Even if the bills are lower compared to when someone is renting the unit, you still need to budget for utilities. When you show prospective tenants the property, everything needs to be in proper functioning order, including the electric and water systems.
Absence of rental income won’t excuse you from paying the regular insurance payments for flooding, hazards, and liability for your property.
4. Not factoring for regular maintenance costs
The older your rental property, the more you need to budget for the regular maintenance costs. This will pay off in the long run, since frequent preventative maintenance will lessen emergency repairs and major damages.
Here are some areas to focus on when conducting regular maintenance:
- Exterior curb appeal
- Interior common areas
- Seasonal maintenance (like tree pruning and snow removal)
- Appliance maintenance
- Cleaning costs
- Pest control
- Waste maintenance
5. Not budgeting for miscellaneous expenses
Little expenses can quickly add up, and you should consider budgeting for miscellaneous costs. When you’re handling a rental property business, you should account for all expenditure:
When you have vacant rental units, you need to spend money on marketing advertisements to attract potential tenants.
When you live far from your rental properties, you must budget for transportation costs like vehicle maintenance and fuel. Additionally, there are time costs associated with constantly checking up your properties.
Tax filing and bookkeeping documentation are required paperwork that must be kept updated to run a successful business. There must be an ample budget to hire professionals who will create organized systems to make the transactions easier for everyone.
The Bottom Line
Investors must set up a budget to prepare themselves against inevitable fees and bills associated with owning a property. Hiring an excellent property manager or a property management company is a great investment for first-time investors to help them lower their chances of making commonly made mistakes. Investors in Orange County should select a great property manager who will partner with them to manage their investment property and focus on maintaining an appropriate budget for the rental.