Real estate investors will often consider the benefits associated with passive income before they take the time to contemplate the usual pitfalls. There are a wide range of real costs that are considered. However, there also numerous hidden costs that can trip up multifamily property investors.
Some of these costs are monetary and some are not. For example, the anxiety and uncertainty that is created by an investment is a hidden cost. The toll that these investments can take on the investor’s personal life must also be considered. Operating expenses are expected because they are simply part and parcel of property ownership.
The same principle applies to capital expenditures. These expenses are designed to extend the life of the property, though. If the expense improves the life of the property for at least one year, it falls under the capital expenditure umbrella. Without further ado, here’s a guide to the hidden costs that are not always considered in depth…..
1. Lack of Quality Employees
In order to maximize real estate investment potential, the property owner will need to find the proper employees. A resident manager will need to be able to roll with the punches and deal with changes as they come. If the investor is forced to make a replacement due to incompetence, they are forced to eat the costs of the resulting legal fees and there is no price that can be placed on the negative energy that will have to be expended.
The investor must select the amenities that match with their base of tenants. Otherwise, it is spending for the mere sake of doing so. In some instances, the investor may not consider the necessity of amenities before purchasing a property. It behooves the investor to take a closer look at their competitors first. What amenities do they have to offer? In order to keep up with the rest of the marketplace, there are certain costs of doing business.
3. Lack of Preparation For Turnover
The investor may have considered this aspect but have they considered it from all possible angles? Sure, the investor has probably contemplated the loss of revenue but have they also factored in the costs of preparing the unit? These are the hidden costs that cause so much drama for the unprepared investors out there. If an apartment takes one month to prepare for the next tenant and there are a number of costs associated with this process, there is essentially no way for an investor to recoup these losses.
4. Capital Expenditures
These are the expenses that are related to the long term viability of the property. If an air conditioner needs to be replaced or the roof needs repairs, these are capital expenditures. These are the types of costs that come out of nowhere and hamstring a real estate investor. That’s why a savvy investor is always sure to budget for these expenses. As a rule of thumb, each unit will require at least $250 per year to guard against these unforeseen costs.
5. Safeguarding Against Increased Expenses
The costs that are associated with property upkeep are not going to remain static over the long haul. Sure, that landscaping bill might be $500 today but what happens when it climbs to $600? The top investors safeguard against these types of expenses by taking the time to review their records each quarter. They must also be sure to keep accurate records in case they need to speak to a vendor about rising costs.
Being proactive when it comes to repairs is one of the best decisions that a real estate investor can make. When properties are neglected by their ownership, the rental rates drop and the value will also plummet. If the investor starts to collect less rent, the “death spiral” has begun and it can be very hard to extricate oneself.
The Real Estate Investor’s Task
Real estate is a numbers game, for sure. On the other hand, those who focus on the wrong numbers are placing themselves in a needlessly difficult position. The costs of owning a property do not always reveal themselves immediately. Please be sure to take all of the aforementioned expenses into account and factor them into any analysis.