Average and normal are not the same thing, no matter what anyone says about the matter. This a key theme that real estate investors need to remain aware of at all times. In order to learn more about the difference between average and normal, an investor will need to break down a couple of years in the life of an ordinary rental property.
Money does not always flow in an uninterrupted manner. There are always going to be existential threats to the investor’s peace and tranquility. The income streams tend to move without any significant impediments for an indeterminate period of time. However, there are always going to be storms of expenses that crop up without a moment’s notice.
Rental cash is a good way to visualize this principle. Those who find themselves confused when it comes to budgeting will definitely want to make sure that they are accounting for their expenses as accurately as possible. Otherwise, mistakes are made that can be very costly over both the short term and the long haul. Once you are able to estimate your expenses accurately, you can also learn how to calculate operating expense ratio.
A Closer Look At Rental Life Cycles
For the sake of the conversation, let’s say that the property in question is currently renting for $1,000 per month. This is a fairly standard rate in most instances. At least 40 to 45 percent of this cost is going to go towards the mortgage for the property. Property management expenses also have to be considered and these can range from 8 to 10 percent.
Even those who are not paying for a property management service will still have the same expenses if they are handling this task on their own. That places the monthly expenses somewhere between $450 and $550. This is great but what happens once the unexpected expenses start to crop up and cause problems?
That is why it is important for investors to study as much as possible. The more information that the investor has at their disposal, the easier it becomes to prepare for those rainy days once they have arrived. There is no reason to be caught off guard in these instances.
Examining The Difference Between Normal and Average
While some might be saying that the normal amount of cash flow is the number to go with, those who are more experienced know better. Instead of going with the number that is obtained when things are at their best, it is pivotal for investors to come up with an average that is based on at least two years worth of data.
This gives the investor an average to work with that is much more indicative of what to expect. No one is going to be able to remain fully prepared for unexpected expenses but there is something to be said for having a realistic point of view. A real estate investor cannot go into this process with blinders on in this regard.
What Type of “Irregular Expenses” Can Be Expected?
The landlord of a property is always going to have to fix various items out of pocket. These are the expenses that will eat into a “normal” month’s revenue. Let’s say that the tenant is experiencing an issue with their water heater or their furnace. These are costly problems that the landlord must fix out of pocket as quickly as possible.
Roof repairs, painting crews, these expenses simply never stop. Labor expenses, property management fees and loss of monthly fees when transitioning to a new tenant also have to be considered. A property owner cannot reasonably expect to fill every vacancy in perpetuity.
Turnover expenses are not factored into the equation as much as they should be. That is why too many landlords allow themselves to fall into the trap of simply raising the rent when they are looking to increase the amount of money that is made during a “normal” month. This is just a temporary measure that does nothing to address the real problems.
Any real estate investor that is looking to remain solvent and successful over the long haul must plan for irregular expenses. It is easy to simply assume that the “normal” monthly revenue will cover everything. Unexpected expenses are the name of the game for real estate investors and only those who prepare themselves properly can avoid the typical pitfalls.