A Primer for First Time and Reluctant Real Estate Investors
4 Surprise Expenses for Your First Rental Property
There are 4 regular and predictable expenses that most first time real estate investors miss when calculating the profitability of their first rental property. These aren’t the items that the Inspector missed before you bought the property, but things that should be plugged into the profitability equation every time to evaluate a new purchase. Even if you are one of the new reluctant landlords brought on by the housing bust and have been forced to rent a home that just will not sell, you will need to pay close attention to the following surprise expenses:
- Property Taxes – Homestead exemption is often where both new residential real estate investors and reluctant landlords miscalculate. Most citizens know that their county property appraiser maintains public records of assessed property taxes by owner name and address. What the unwary will fail to consider is that the property taxes may change when a property changes hands to a non-resident owner. Florida, for example, instituted a “Save Our Homes” measure some years ago that caps property tax increases for primary residences to 3% per year. If you’re in an area where values or tax rates have increase dramatically, you may be in for a rude surprise.
- Insurance – If you decide to rent out your current residence, you may be surprised to learn that your homeowner’s insurance provider no longer wants your business! Some large insurance companies simply do not cover rental property, or may have certain restrictions. While searching for insurance coverage on an older property we purchased specifically for investment, we discovered State Farm would not insure homes in certain geographic parts of our county. Call around to find out how your insurance coverage may change.
- Maintenance – The rule of thumb for many real estate investors is to allow 10% of the rental income each month or year for maintenance. If you are considering an older property you may want to increase this estimate. You may eventually have to replace appliances or repair a roof. Also included in this Maintenance category are turnover expenses; each time a tenant leaves, you may have to paint, replace carpet, fumigate, etc.
- Vacancy – We have had great luck with our own rental properties and have found new tenants within 30 days in all but one case. Some investors use more complicated formulas to estimate vacancy rates, but the simplest is to set aside either one month’s rent or 10% of your rental income for vacancy. If your property will most likely be rented by college students you will have more turnover than in a strictly suburban area. We have tenants that have been in the same home for 3+ years, and others that have left in just one.
Rental property expenses can mean the difference between a property that adds to your income and net worth over time and one that saddles you with years of red ink. Choose carefully!