No matter how much we wish otherwise, every investment property is going to have at least some expenses associated with it. At a minimum, taxes, insurance, repairs and maintenance, and possibly water and trash service on multifamily properties, are going to become due and payable over the course of a fiscal year. All are inevitable, and all must be estimated, budgeted for and managed.
Insurance
Our first universal cost to consider and manage is insurance. An insurance agent who specializes in working with real estate investors is critical to your success. At a minimum, you’ll want to carry liability insurance, which covers you if someone is hurt on your property. This is generally very inexpensive at less than $15 a month, in my experience.
Some of our clients are self-insured, meaning they may pay for liability insurance but they do not have any other coverage on their properties. This means they personally absorb any losses that may occur. If you have a mortgage on a property your lender will specify the minimum amount of coverage they require. This approach is obviously risky, and I would never recommend it to my clients.
Property Taxes
Property taxes are a fact of life. However, they too can be managed if the county’s assessment of the value of the property is unreasonable. In Ohio, a property owner can appeal his or her taxes to the county Board of Revision between January 1 and March 31 of each year. If you can show that your property is over-valued, you may be able to have the assessed value reduced which will reduce your property tax liability.
What you paid for the property is considered fair value if the transaction was at arm’s length. In Ohio, arm’s length transactions do not include “distressed” sales. Short sales and sales of bank foreclosures are considered to be distressed sales. However, if you have a certified appraisal of the property that supports your opinion of value, or you can show that current assessed values of like properties in the area are less than yours, you may be able to obtain some relief. If you truly believe your tax assessment is out of line, it is generally worth pursuing relief.
Repairs And Maintenance
No matter what you plan for repairs and maintenance, it will likely not be enough. I budget 20% of collected rent. Many people feel this is excessive. In my experience, it is the minimum acceptable reserve for the properties I own. Not every property I own costs me 20%, but a few will cost me far more.
By applying this percentage across all of your properties, you can usually avoid being surprised and caught short. If you have 50 properties renting for an average of $500 a month, that is $25,000 a month in gross income. Twenty percent of that figure is $5,000, or $60,000 over the course of the year to cover labor and materials. If you don’t need all of it any given year, it is additional profit that you can use for new properties or upgrades to existing ones.
Professional Management
Professional management is not really an expense; it is an investment. Hiring a professional to help you maximize the return on your investment just makes good financial sense. It is, however, optional, as any property owner has the choice of managing their property themselves.
My view is that each of us should focus on what we do best. Most of the investors we work with have successful careers and incomes outside of real estate. They are often using real estate as a hedge, or supplement, to other investments. They are diversifying their portfolios.
It makes perfect sense for these investors to do what they do best and let us do what we do best. For these investors, professional management is not really optional at all. Professional management allows them to focus on their core passions and money-making activities.
And One More Thing: Get A Good Accountant
The tax benefits of investing in real estate are many. Personal tax strategy is well beyond the scope of this article and my personal expertise. But what I can tell you is that you must find an accountant who understands real estate investing. Best case, they should own investment property themselves or, at a minimum, have an extensive client base of investors.
I am on my third accountant in 10 years. I can tell you from personal experience that you can ask three different accountants the same question and get three different answers. I hate to think of the tax I overpaid in various years, but I am grateful to have finally found a professional who understands my situation. Ask your business associates, friends and advisors for referrals. Take your time and do your homework. Your accountant can be a major resource and aid to your profitability, or they can cost you a lot of money.
Conclusion
Expenses are a fact of life, like death and taxes. We cannot avoid them. We can only manage and hopefully mitigate them. We can also be realistic about them and budget accordingly. And finally, we can invest in professional counsel to help keep us on the path to profitability.