Real estate investing can be very lucrative. There’s no doubt about that.
In fact, real estate has produced more wealth than any other industry in the history of the world.
That said, real estate investing isn’t a guaranteed road to riches. There are certain things that you must do in order to have a successful rental business.
The most important aspect is knowing how to properly budget for it.
Unfortunately, this is one area that many real estate investors Orlando, Florida often struggle with.
So, in today’s article, we’re going to look at 6 mistakes to avoid when budgeting for your rental property.
1. Not budgeting for property repairs.
As a landlord, one of your responsibilities is handling property repairs and maintenance.
This is often one of the biggest problems tenants have with their landlords. Not repairing the property when it’s truly needed.
Ignoring repairs can also take a toll on the quality of your investment. Left unattended, small repair issues can quickly become serious and far more costly to fix down the road.
And, in extreme examples, your tenant can choose to exercise one of their legal rights. For example, they can decide to withhold paying rent until you fix the problem.
You don’t want it to get to that do you?
Budgeting for repairs is, therefore, important. So, how much of a budget should you allocate towards property repairs? Most experts tend to agree on the 1% rule.
So, supposing you have a property worth $200,000, it means that $2,000 should go towards repairs.
2. Not budgeting for your exit costs.
You might hear something along the lines of: “I only owe $130,000 on my $200,000 property! This means my property is worth $70,000 in equity!”
Some property owners like to brag about how much equity they have. In most cases, they are usually wrong, just like the braggart in our example above. For a $200,000 property and a loan of $130,000, the equity will be much lower than $70,000.
Between Realtor fees and other seller closing costs, you should set aside at least 10% for the exit costs. Thus, that would mean that the equity in our example would be $50,000. ($70,000 – 10/100 X $200,000).
And, the $50,000 is only a conservative figure, mind you! You haven’t even considered your carrying costs, as you market the property. The equity could be slightly lower.
3. Forgetting to factor in rental vacancies.
Rental vacancies are every landlord’s worst nightmare. With a rental vacancy, it essentially means zero income at the end of the month. Sadly, it’s something that is bound to occur during your career as a landlord.
And since it’s an inevitable reality, it only makes sense to be prepared by budgeting for it. Remember, there are bills you must pay regardless of whether your property is occupied or not.
Good examples of such bills include insurance, utilities, taxes, and mortgage.
That’s why it’s important to try and maintain a good relationship with your tenants. This can help you keep your rate of tenant turnover low, consequently saving you money.
4. Forgetting about regular maintenance.
Now you may be wondering: Aren’t repairs and maintenance one and the same thing? If this is what you are thinking, you are wrong! A repair is essentially a capital intensive upgrade.
There will always be something in your property that will require upgrading or replacing as time goes by. When that time comes, it’s important that you be prepared, as some repair costs may cost you a tidy sum.
Maintenance, on the other hand, has more to do with how your tenants use (or abuse) the property. Good examples of common maintenance tasks include repainting and recarpeting.
Maintenance costs usually spike during tenant turnovers. Just like repairs, maintenance will cost roughly one percent of the property value per year.
5. Not budgeting for property management services.
Do you work with a property management company or do you manage it yourself?
Owning a rental property is one thing and managing it is another. Anyone can own property, but not anyone can manage it. Managing a rental property requires a number of distinct skills, knowledge and industry experience.
In terms of skills, you have to know a number of things. You have to know how to find and screen potential tenants. You also have to know how to maintain a good relationship with them.
You have to be well-versed with all federal, state and local laws regarding the landlord-tenant relationship. For example, you have to know the Fair Housing Laws, Florida landlord-tenant laws, and Florida security deposit law just to name but a few.
On industry experience, you simply have to know what works and what doesn’t. A rental marketing strategy is one good example.
As you can see, landlording isn’t just all about collecting rent at the end of the month. There is so much more involved. It’s for these reasons and others that make many property owners turn to professional managers.
The right property manager has the experience and skills to create and administer a good property management plan. And thanks to their help, you’ll now have free time to do other things that matter to you.
6. Forgetting miscellaneous and administrative costs.
As a landlord, it’s inevitable that you will find yourself running into a slew of other trivial costs. While they may seem small, they can quickly combine to something significant.
As a real estate investor, you’ll often find yourself spending a lot of time in your car: going to auctions, touring properties for sale, scoping out new markets and visiting your own property
Besides mileage building up, your car will also take a toll in terms of wear and tear.
How about filing tax returns and bookkeeping? These are some of the administrative tasks that cost you money and time.
Sure, these may not kill your budget. But combined, they add up, and you may not even realize it. So, what you want is to put aside about 3% of your annual budget towards these costs.
These are the 6 most common mistakes that real estate investors in Orlando, Florida usually make. If you can avoid them, then you have a great chance at enjoying a great ROI on your investment.
We hope this helps!