Successful management of an investment property centers on balancing expenses and revenue. If you can consistently generate more revenue than you pay in outgoing expenses, you’ll probably be in a profitable position.
Throughout the search to acquire new properties for your portfolio, you’ll likely be projecting expenses with care to determine whether each property would be a good fit … but you have to be careful.
If you underestimate too many expenses, or underestimate expenses by too wide a margin, your entire profitability could be threatened. Do you know the most common expenses that landlords underestimate, and how to calculate them more accurately?
The Danger of Underestimating Expenses
In some cases, underestimated expenses aren’t a big deal. If you generate $5,000 in monthly income and your repairs cost $350 instead of $325, you’ll barely notice the difference.
Problems tend to unfold when this mistake is repeated consistently or on a much larger scale. Estimates can be thrown off due to a variety of factors.
You could be working with bad information. You might be inaccurately assuming that things will go well. You could also overlook certain expenses entirely.
Whatever the case, if your estimates are sufficiently off, this could compromise your entire operation.
The Most Commonly Underestimated Expenses
These are among the expenses that are most often underestimated by landlords.
- Property taxes. It can be difficult to estimate property taxes accurately, especially if you live in an area that changes its property tax rates regularly. Depending on where you live and the value of your property, this could amount to thousands or tens of thousands of dollars per year. Also, property tax rates change over time – so the most recent data available online may not accurately reflect what you’re going to owe next year.
- Standard maintenance. There are many forms of maintenance that your property may require, from changing the air filter in the furnace and checking the smoke detectors to cleaning out the roof gutters. These are relatively small, inexpensive tasks, but cumulatively, they can add up to be more expensive than most of us initially assume. Plus, in the act of regular maintenance, you may discover new issues that require prompt attention and action.
- Utilities. Depending on where you live, you might be responsible for paying the utilities on the property. Or you might volunteer to pay for the utilities and include a small additional fee in the monthly rent you charge. You could be shocked to discover the size of utility bills once your tenants have settled in.
- Marketing and advertising. You probably know that marketing and advertising costs can be costly, especially if you promote your property aggressively. But expenses may quickly escalate if you find your property vacant for longer than you anticipated. You might be forced to continue or expand your marketing, and the costs could escalate from there.
- Tenant screening. Tenant screening can be expensive if you use a third-party service solely for this purpose. It grows more exorbitant if you reject several tenants after ordering a credit check for each of them. Of course, it’s a challenge to reduce costs in this area, because if you ignore or skimp on tenant screening, you could set yourself up for even worse losses in the future.
- Vacancies. Vacant properties are a significant obstacle for landlords who hope to maximize their income. Every month your property remains empty is a month you’ll absorb the full expenses without any revenue to compensate. A month or two is to be expected, especially when the market is slow, but if you’re stuck with a vacant property for too long, that will cut into your profitability.
- Permits and inspections. Depending on the nature of your holdings, where you live, and the renovations you’re planning, you might have to procure permits or submit to inspections to certify your property as habitable and appropriate for tenants. These can be expensive in themselves, but they become even more costly if they result in your having to make further changes to the structure or lot.
- Renovation projects. Certain renovations have the potential to make your property more attractive to renters, which would enable you to charge more rent and fill vacancies faster. But renovation projects can also creep beyond your initial budget due to unexpected developments, high material costs, and expanded need for labor.
- Evictions. We hope you never have to evict a tenant. But if someone damages your property or refuses to pay rent, you may have to go through that process. A single eviction could cost you $3,500 or more – and eat up weeks of your time as well.
Tips for Better Estimates
Fortunately, we can offer a few tips to help you estimate your expenses with greater precision.
- Plan for the worst-case scenario. Always keep the worst possible outcome in mind – and don’t be afraid to bump up your estimates. If everything goes well, you might be able to complete a project in just 2 hours with $500 in materials. But what happens if some of those materials collapse? What if it takes you 5 hours and you still haven’t completed the job? Try to picture the most pessimistic scenario so you can ground your estimates in reality.
- Work with better contractors. You can also flesh out your network and build relationships with more reputable contractors. Reliable builders will provide firmer, more dependable estimates when you’re planning new jobs. In the meantime, you should obtain quotes from a variety of contractors to arrive at an average between them.
- Examine trends to anticipate increases. Pay attention to trends in various portions of your region and your industry. Are property taxes gradually inching higher? Are the costs of particular materials rising? You can use this information to plan better for the future.
Are you struggling to estimate the expenses associated with your rental properties? Or are you just looking for a convenient and affordable way to improve your property management?
A property management specialist like Green Residential could be exactly what you need. We can help you with everything from tenant screening and property marketing to repairs and evictions. Contact us for a free consultation today!
Michael is Green Residential’s Vice President. He helps to keep the team organized and running smoothly. Prior to joining Green Residential, he spent 12 years working at Cadence Bank in the mortgage loan servicing department, where he specialized in loan audits, modifications, and bankruptcy-related issues for the mortgage portfolio.
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