When investing in rental properties, I learned through my journey that I should not just focus on how I can make money on my investment. Yes, they are a good source of passive income, but you should also prepare or anticipate yourself from the expenses that may come in the future. I think that sharing these from my own experience gives more value to future investors like you.
1. Vacancy
There’s always a cost associated if the rental property is vacant. If you have a single-family unit, once the tenant moves, it is 100 percent vacant, but in the case of multi-family, not all doors are vacant, and you are not only dependent upon one residence. This is why I always prefer multifamily property because not all of them are empty.
Yes, it would be great to have a tenant there, but not all the time they will stay there and will move out sooner or later. You have to consider this as part of your underwriting for your rental property expenses.
I usually factor 10-13 % for the vacancy and loss, but some people only calculate 5% just for vacancy when underwriting a single-family residence, a duplex or other asset. If you cannot add that into your assumptions, it’s not showcasing the true return on investment because you have to have those. You’ll surely have a hard-time getting the income you need.
2. Management
Whether you are self-managing or have third-party management, it is also an expense that you have to anticipate in your underwriting. Usually if you have third party management that manages your property, they might charge at least 8-10% of the gross rent monthly. Also, the larger the property is, the lower the actual management fee.
In my case, I self-manage, and still billing the property for the property management side, so it ranges between 5-6 % of the gross rent. Even if you are self-managing and not charging a property management fee, I highly recommend it because the risk involved with you servicing that property, and also you’re time for you to save time.
3. Unexpected Repairs
The older the property is the more unexpected repairs that will come in the future. Even if you can address all that deferred maintenance and repair is upfront or recurring, it is still an old property that requires unexpected repairs. It is important to have that in your expenses.
For me, I do have capital expenditure. In my teams deals, we are underwriting at least $300 per unit to take into consideration over the course of owning that property, it is the expenses that are going to be associated which they need to allocate because there’s a high probability that we are going to use that fund according to the age of the property. These expenses should always be official upfront on the underwriting side on multifamily rentals. Don’t skip everything when it comes to underwriting
4. Taxes, Insurance Fees and Legal Side
Property taxes should be added in your assumptions as well. Have an expert to help you assess the property values. You have to diligently evaluate the property to avoid any problem and cost in the future.
Don’t forget the permits. In any city or state you are, it is a must to have enough permit and insurance for you to run your business. There are certain costs associated when taking care of these important documents. Make sure that you are ready for it.
When it comes to legal, some investor they may be handling their own evictions but if you have a lawyer that can represent you well and who will show up in the eviction court to save time and energy. It also helps you prevent any issues in case someone file a lawsuit.
5. Marketing and Advertising
Advertising plays a great role in making sure that your property has the right exposure it needs to attract potential occupants. There are various free platforms that you can use to advertise your property, such as Zillow, Trulia, Hotpads, Craigslist, and others.
I always use rentlinx. It is a paid service, that will allow you to post specific property there and automatically sends the case to Zillow, Trulia, Hotpads and other major listing sites.
The above mentioned are the five rental property investors should always anticipate. I hope I was able to enlighten you with my perspective on avoiding the pitfalls of not doing the right research and on how to address these expenses that you need to anticipate in the future.
P.S.
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