Under-Estimation of Expenses

The second error in real estate investor judgement is Under-Estimation of Expenses.  Just like with over-estimating revenue, under-estimating your rental property expenses can torpedo your real estate investment results.  There isn’t an entrepreneur out there who hasn’t done this, even experienced folks.  It’s easy to do when the market is robust and favors Landlords and we are lulled into thinking the bull market will run forever.  It’s easy to under-estimate your expenses for labor costs to rehab a property, to flip a property, even to just get a home ready for showing after a seller moves out.

The most frequently under-estimated cost?  Vacancy carry costs.  Lawn mowing, snow removal, and utility bills.  These are hard costs that Landlords most frequently forget.  While it may seem like a small monthly cost of a few hundred bucks, if a property goes vacant for 2-3 months, that gets testy real fast.

Here’s a real-life situation of how it happens:

  • You find that diamond in the rough property.
  • You negotiate a decent offer price and the Seller accepts it.
  • You then do the inspection.
  • The inspection reveals a handful of major defects, some of which the Seller agrees to fix, others declined.
  • You now are negotiating with YOURSELF and the SELLER–which items can you mentally minimize to convince yourself to get to closing table.
  • Then you close on the rental property and get it rented with a new tenant.
  • The new tenant settles in and begins paying rent.
  • Then the new tenant begins reporting problems with the windows not working.  Crud…..you didn’t push the seller to get them fixed.  $$$$
  • Then the new tenant reports problems with the kitchen faucet leaking.  Double Crud….again, your posterior muscle cramps up because you rationalized this as not being an expensive issue during the inspection phase.
  • Then the new tenant reports {insert maintenance issue here}…..

Not only has your pro-forma been blown out of the water, but now you have a disappointed tenant who likely can’t wait to move out of your slumlord property, thus incurring you more vacancy expense, tenant turnover costs….Triple Crud.

So the take away for today?

  1. Sharpen your pencil.
  2. Grit your teeth.
  3. Write out ALL your known expenses.
  4. Grit your teeth harder.
  5. Write out ALL the possible expenses that have a 50% chance of occurring.
  6. Add all the numbers together.
  7. Look again at your pro-forma.
  8. Does it still work?

Only you can answer #8 truthfully.

Here’s to your pursuit of Financial Freedom with rental properties!

 

Dan Baldini

 

 

 

 

 

P.S.  Is it time to have a fresh set of eyes review your numbers?  Happy to assist.  Schedule a phone appointment using this handy calendar link.