Projecting Operating Expenses On Real Estate Investment Property

Posted @ 7:40 pm - Filed under BawldGuy Axiom, Buying Income Property, San Diego Property Owners

Yeah, I know income property owners and those lookin’ to get into their first investment probably don’t wanna hear this: Before expenses, figure out what the local vacancy rates are. Then verify what you’ve been told about ‘market’ rents. Why work on projecting expenses when vacancy rates scared you off?

Without belaboring the point, existing vs projected rents, at least in my experience has been an opportunity for frequent comic relief. Whenever in a playful mood I’ll mess with a listing agent who wants the investor to pay for ‘market rents’ his owner ain’t gettin’, and never has. After doin’ my Columbo bit on him about five minutes or so, they either wave the white flag, or become seriously agitated. But I digress, and won’t belabor the point, as promised.

This will take more than one post, possibly three. I don’t wanna gloss over anything as operating expenses is one of those ‘nuts ‘n bolts’ subjects that matters big time.

Real Estate Taxes

Relatively easy to predict are the real estate taxes, at least in most regions. First you have the current taxes, then you learn the local assessor’s marching orders and project accordingly. In California for instance, about 12.6 seconds after you close escrow you’ll get a supplemental tax bill. That was before they went bankrupt. Check your assessor’s office to find out how they do it, and how quickly they act. It’s our policy to project whatever rate we’re told will be set in place, even if it’s not yet happened.

Also, check into any increases that may be in the offing. In California we don’t hafta worry too much about that because of the 1978 Constitutional Amendment limiting increases to a max of 2% a year regardless of appreciation, with very narrowly defined exceptions.

Property Insurance

Here’s another one you can nail pretty closely. Pick an insurer, get a number, there it is. The key though is more in the actual coverage and the relative expertise of the agent. Most investors like to have ‘lost rent’ coverage and other rental related clauses in their policy. Also, instead of going through the expense of creating various entities designed to protect you from liability, we usually recommend buying what’s known as an umbrella policy. It normally covers a couple commas worth, and the price is very affordable — especially when compared to creating all the various entities.

Professional Management

Dad forced me to run a management division of our company back in the ’80’s. I hated it, as most sane folks would. From that experience I’ve come to assume management companies are either incompetent/lazy or downright apathetic about their job description until proven otherwise. Whenever we open a new area for our clients, the first thing we do BEFORE we even talk to clients about investing there, is to secure a local management firm. Sounds easy enough, right? Most of the time it’s a huge pain in the butt.

The good news is, when a solid firm is finally located, the expense can be nailed down. It’s expressed as a percentage of collected rent. For smallish income properties, 1-4 units, this will almost always be 8-10%. Don’t be a price shopper on this one. You want quality first. One of my all time favorite people in the world just happens to be a client too. She’s now one of the most knowledgeable investors I know in person when it comes to managing income property. She’s saved countless people who knows how much money on various forums the last several years.

We spoke today about how so many refuse to even pay minimum attention to what the real operating costs of a particular property might be. I told her of what happened to send Josh and I into a fit of rolling eyes and laughter this morning as we were perusing some local listings. An agent had put into their listing of a rental, total operating expenses of around $2,400 yearly. This, on a $400,000 property. Never mind that figure was guaranteed to be in error the second any sale closed. It was the annual real estate taxes for Heaven’s sake. They were sure to more than double for the next owner.

BawldGuy Axiom: High quality professional management of your income property is almost always underpriced — most investors realize this too late.

Unfortunately this is more the rule than the exception when looking at income property listings on MLS systems around the country, not just here in San Diego. It stopped being funny ‘ha-ha’ long ago. Professional management companies worthy of the name, are worth their weight in gold. Think 5% is less than 10% to pay a good one vs a crummy one? Wait ’till you spend 2-5 times the difference on one bad tenant. Believe me now, and you won’t hafta go through that learning curve. You’re welcome.

Tomorrow we’ll continue down the list of operating expenses. Meanwhile, there’s no reason you and I can’t chat about what’s going on, or not, in your real estate world. Try 619 889-7100 and see what happens. Have a good one.

This entry was posted on Tuesday, June 2nd, 2009 at 7:40 pm and is filed under BawldGuy Axiom, Buying Income Property, San Diego Property Owners. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.