So, you’re thinking about buying an investment property, but you’re not sure what expenses to expect aside from the mortgage payment and any upgrades you plan to make? Well, let me share with you 7 of the unforeseen expenses you should plan for.
1. Closing Costs. First off, there’s always going to be closing costs. These include things like title fees, appraisal fees, and attorney fees, and are often 2-3% of the purchase price. Your lender can give you an accurate estimate of what these will be. Make sure you budget for these costs and that they’re factored into your overall investment plan.
2. Property Management. The second expense to plan for is property management. If you’re not planning on being a hands-on landlord, you’ll need to hire a property management company to handle the day-to-day operations of your investment property. In Spokane, this typically runs about 10% of the rents per month plus a start-up fee that can run as high as $1000 or more.
3. Repairs, maintenance & cap ex. The third expense bucket to think about is repairs, maintenance and capital expenditures. No matter how well-maintained a property is, things are going to break down over time. Make sure you have a contingency plan in place for unexpected repairs, such as a new roof or a broken air conditioning unit. And, don’t forget about regular maintenance, like lawn care, cleaning, and painting. I typically recommend budgeting about 5% of the rental income for repairs/maintenance and cap-ex (account for as two separate expenses). Note that these percentages could be lower if you’re buying new construction and could be higher if you’re buying a really old property that hasn’t been updated.
4. Property Taxes. The fourth expense is property taxes. You can find the property tax amount through a county parcel search since this is public information. These can vary quite a bit, so you want to make sure you’re accounting for enough in your calculations and be aware that they do increase over time.
5. Vacancy. The fifth item to account for is vacancy. This is the one expense I see people miss the most. You’ll want to have a reserve account in the event of tenant turnover and your units being vacant for a month or more. In Spokane, 6% is a reasonable vacancy rate but make sure to do your due diligence for your own market.
6. Landlord-Paid Utilities. The next expense to include is an estimate of landlord-paid utilities per month. Often the landlord pays for water, sewer garbage and the tenant pays for electricity and gas. You can often get these values from the seller of the property or you can call your local utility companies for estimates. If you still can’t get any information, you can likely estimate about $75/month per unit.
7. Insurance. And finally, the last expense you need to consider the cost of insurance. Make sure you have the right insurance coverage in place to protect your investment property. This includes things like liability insurance, property insurance, and insurance for any natural disasters. You can call your local insurance broker or agent to get a quote or you can just estimate about $0.60 per sq ft.
So, there you have it! These are some of the unforeseen expenses you should plan for when buying an investment property. Don’t let these costs catch you by surprise, and make sure you have a solid plan in place to cover them. Have any questions about analyzing an investment property or anything else? Please reach out and let me know – I’d be happy to help!
