Most real estate investors when buying an investment property, they calculate the cost (mortgage payment plus taxes plus insurance) and deduct that from income (rent collected) to get cash flow. Unfortunately, a lot of newbie investors forget to take into consideration the simplest of expenses. A savvy investor never excludes other expenditures when computing, as it is not just about mortgage payments, taxes and insurance. It’s about all those other expenses that drain your cash flow and in some cases cost the investor to dig in their pockets and support the properties. Having said this, we will be discussing three of them in this blog -- vacancy fee, maintenance fee and property management fees. Also, we will talk about the reserve fund and its overall relevance to any investment properties.
Although you might not worry about a small vacancy fee or percent rate when calculating your expenses because it doesn't seem like a big deal, I challenge you to think otherwise. Here is an example of a friend of mine who had 39 doors and had seven of them empty at the same time. If he had not allocated vacancy fee and planned for it, he would have been in trouble and would have needed to come up with $1500 - 2200 for each of the vacant property altogether. That is why you and every real estate investor need to allocate a certain percentage and build this fund over time, which is usually about 5% depending on the property and the state its in, every month so you will never be in that predicament.
In line with the maintenance fees, The Reserve Fund fee also needs to be regarded when buying properties. This is, usually, overlooked, but is a must because you would need to have at least two to three months' worth of rent in case of a vacancy. You are probably thinking that this is too much money just for the reserve fund, but the truth to the matter is, if you are going to invest in properties, you have to be financially prepared to cover any short falls if you did not allocate for it. Thinking ahead is just part of being serious about the business.
The second expense, I strongly recommend that another 5% is set aside each month for maintenance fees. Yes, the property might be in mint condition when you buy it (in some cases) but you need to think expense when tenants leave. You'll need to paint the unit, shampoo the carpets, hire a cleaner to clean it, and there will always be repairs to be done around the properties. Save enough money for any unanticipated issue that may come up or matters that were not pressing during purchase time.
The last expense is, more often than not, overlooked. A common mistake is that new investors think they would not need to account for a property manager (PM) fee because they will be managing and looking after the properties themselves. Sure you can manage your own business, however, if you finally decide that you need somebody to do it for you because you have so much on the go with your full-time job, and/or you now have a number of properties that need to be looked after, then accounting for this expense will help you not dig into your pocket and make it a smooth transition. You would want to be ready for this at any time. Once you own enough properties, it will be necessary to hire a professional property management company. To give you an idea, PM fees range somewhere between 4-10% depending on the area, type and number of properties. Usually, the more properties you have, the better the rate you can negotiate on.
Having a strong plan as you invest in properties will reduce stress and keep your business running smoothly without having to dig into your pocket and cost you more money. Always be prepared for financial emergencies and set aside money every month to take care of business. When you are prepared for what's ahead, you will be able to take care of your investments stress free.
About Tahani Aburaneh
Tahani Aburaneh is Canada’s leading female real estate investing expert and founder of Savvy Investor Agent Certification (SIAC), specialized training that teaches real estate agents how to tap into the rapidly growing investor niche using proven step-by-step systems and tools so that they can generate a constant flow of closing deals, differentiate themselves from other agents, and exponentially increase their commissions. Tahani is also an international speaker and author of the Amazon Best-Selling book Real Estate Riches and Savvy Investor Agent Guide. Having battled adversity since her birth in a refugee camp, Tahani is a living testament of how anyone can rise above the odds by focusing on helping others.