The Hidden Costs When You Own Real Estate - Part 1
It still boggles my mind how Realtors, real estate investors, soon to be real estate investors, don't include this hidden cost when analyzing a property to invest in.
And, if they do include it, it's just a number that doesn't garner the attention it should...
Usually using a fixed percentage to determine it.
What is this hidden cost?
REPAIRS & MAINTENANCE.
Now, I'm going to tell you why this is one of the most important costs you need to take into consideration when you're analyzing a property.
Why the most important?
I know from personal experience, since I myself own over 50 units, there are always repairs and maintenance at a property.
And from my experience, using the benchmark 5% for these costs in your projection doesn't cut it.
Why not?
Well, for one, repairs and maintenance NEEDS to include more then just the repairs you might incur day to day, such as a having to fix a toilet, or cut the lawn, or replace a light fixture.
The repairs and maintenance at your property needs to factor in the FUTURE repairs and maintenance.
Items such as the roof that might need to be replaced in 5 years, or the furnace that needs to be replaced in 7 years.
When you are investing in real estate for the long term, which I hope you are, unless you are fix and flipping a property, you are going to need to be much more accurate when determining a properties FUTURE repairs and maintenance.
Now, you might be thinking, who cares, it's just an approximation, but I'm telling you, it's not!
The main reason is, if you don't forecast these in your analysis before you buy the property, you could and will end up overpaying for it.
Think about it.
When you're analyzing a property, and you want to hit your benchmark Return on Investment (ROI) of say 10%, well that benchmark ROI is based on purchasing it at a certain price.
However, if you low ball your repairs and maintenance cost on the property, then when you actually own it, and you end up incurring these costs, because you will have to replace that roof one day, and you will have to replace that furnace one day, this in turn affects your ROI.
Sidenote, every year you should be calculating your ROI, to make sure your property is making you money, but that's for another day.
Anyways, back to my point.
Don't just include the small repairs your going to incur at a property, factor in all the big repairs, the large improvements that will incur in the future.
Here's what I mean to give you an idea of the repairs and maintenance you NEED to project for and include in your analysis.
What I did was take these repair costs (or more replacement costs), which again, you will incur one day, and extrapolated them out over the useful life, which I project is about 10 years.
This is the repairs and maintenance you NEED to include in your projected analysis for the property you are purchasing.
As I said, I see many investors, many Realtors, always forecasting 5%, or even worse, $50 a month for repairs and maintenance.
Well, this isn't enough, and when you include this extra cost, that YOU WILL incur when you invest in real estate, it will affect your ROI, and if you don't factor it into your pro forma (projected) analysis, you could end up overpaying for your real estate investment.
So, please please please, pay much more attention to your repairs and maintenance that you WILL incur at your investment property.
And if you want to learn more about how to analyze a property, so you include these costs in your analysis, then enroll in my FREE REI bootcamp, where I'll show you how to analyze a property the right way, as well as how you can start investing in real estate right away.
WHAT TO DO NEXT: Enroll in Real Estate Investing Bootcamp
