The most prepared and experienced real estate investors can easily be caught off-guard by a surprise expense or a hidden cost that they weren’t expecting when they invested in a property.
No one likes surprises – especially not financial surprises.
Make it a policy to expect the unexpected when you’re budgeting for your real estate investments. We recommend that you over-budget, if possible. Plan to spend more than you are likely to actually spend. This will give you a bit of a buffer and also protect you from the financial shock that often comes with unexpected maintenance, a reduction in cash flow, and higher insurance or tax bills.
Get to Know Your Fixed Expenses
You know you’re going to have to pay your mortgage every month, just like you’re going to have to pay your insurance, taxes, property management fees, and other professional fees. You might have landscaping or pool service costs. HOA dues are known entities.
This is a good place to start because there shouldn’t be any surprises with your fixed expenses. Just make sure you know what they are and how they impact your cash flow.
Vacancy and maintenance costs will vary, especially considering the market, the age and condition of your home, and what kind of rent you’re earning. You should always budget between five and 10 percent of your monthly rent for maintenance. Even if you don’t use that reserve every month, having it will prevent financial shortfalls when there’s a plumbing issue or a new roof that’s needed.
Benefits to a Five-Year Budget
A good way to avoid surprise expenses is to budget for the long term, not only the coming month.
At Service Star Realty, we put together a five or 10-year budget, which allows us to analyze cash flow and expenses for our owners. There’s not a single formula that works for every property. It depends on the home and on the investor’s short and long term goals.
Setting the budget and then forgetting about it is not a good idea. When it comes to investment properties, budgets are living things – they need to be evaluated and analyzed on a regular basis.
Increasing Rental Property Costs
Rising expenses will often take investors by surprise. There’s going to be inflation, and you should budget for a three percent increase in the cost of goods and services that pertain to your Phoenix rental property. A rental increase will help offset that, so make sure your calculations reflect a higher rent when you’re able to raise it.
We recommend taking a look at your short and long term budget quarterly to make sure you’re on track and no missing any big expenses that may be heading your way.
It’s really an art and a science, and you’ll want to have all the tools and resources available before you settle on an investment property. Don’t buy something without taking a critical look at all the known and potential costs.
We have a full list of what to look at, and we’d be happy to share it with you and talk about how to plan for expenditures that will pertain to your own property and portfolio. Contact us at Service Star Realty for more information.