The Hidden Costs of Maintaining Investment Real Estate

When considering real estate investment, many people fail to consider the hidden costs of maintaining the property. They happily calculate the initial outlay of capital and then start dreaming of the cash flow it will generate. The problem is that these investors fail to consider all of the financial costs as well as monthly bills, regular maintenance, emergency repairs or upgrades, and the risks inherent in vacancies. Without proper planning, an investor could end up in serious financial trouble.

Financial Costs

The upfront costs of a real estate investment are easily recognized in terms of the down payment and the interest on any mortgage necessary to secure the property. Many investors also understand that if they pay down the mortgage faster, they will save money in interest. However, investors also need to take into consideration insurance requirements and property taxes. Insurance may be a part of the mortgage and property taxes need to be paid semi-annually.

Monthly Fees

Then there are the monthly fees associated with running a real estate investment. These include such things as fees for sewer, water, and trash removal. Some properties may have additional costs such as electric or gas if the building is serviced as a whole rather than individual units. However, most owners can avoid these costs by installing individual furnaces in the units so that the tenant becomes responsible. Another possible expense could be for a property management service if the owner wishes to be hands off.

Regular Maintenance

In addition to monthly fees, real estate investment often requires an outlay of cash for regular maintenance. These can include such things as painting, grounds keeping, or minor repairs such as fixing leaking faucets. Owners need to budget for these expected expenses by setting aside anywhere from 5 to 10 percent of the net monthly income. In addition, the age of the property should be taken into consideration as older properties may need more maintenance.

Emergency Repairs & Upgrades

As with regular maintenance, older properties may be at an increased risk of needing emergency repairs or larger upgrades such as a replacement furnace or a new roof. The best way to handle this is to establish a rainy day fund to be used only for those large expenses. This fund, plus routine inspections, can help prevent an owner from getting caught off guard. Also consider if these are jobs that will need to be hired out or if an upgrade will raise property taxes too much. An upgrade is not always worth the investment it requires.

Vacancy Rates

Certainly, investors count on the cash flow generated by the real estate investment to meet their monthly expenses. Unfortunately, vacancies can turn a solid investment into a money pit. As a result, owners must factor that risk into their projected budget and must charge rents to compensate for the missing income. Consider such factors as the occupancy history and the stability of the renters. For example, vacation rentals may be less stable, while properties in good school districts will have fewer issues.

As a result, real estate investment is not a simple matter of paying for the property and then sitting back and raking in the profits. Owners must take into account hidden financial costs and must budget for such things as routine bills, regular maintenance and emergency repairs and upgrades. They must also make sure there is an adequate cushion to cover for vacancies that will occur. However, with a little careful planning, owners can still make a tidy profit on their investment.