Real estate is one of the most reliable investments that you can make. And there’s more than one way to make money from a rental property.
Being a property owner is a great source of passive income, but only if you have a reliable property management company to assist you with the operation side of things. Surprises are scarce in this line of business, and even when they do come around, not much damage is done. Still, you need to make sure that your budget accommodates everything.
If you’re tired of the uncertainty that comes with budgeting for your rental property and want to create a system that allows for better predictability and preparation, you’re at the right place. We’re about to discuss what you need to budget for as a real estate investor.
A Rise in Condo/HOA Fees
Whether you own a condo or a full-on house, you need to be ready to pay those HOA fees. They’re a great way to split the bill with your neighbors; water, garbage disposal, and sometimes even maintenance may fall under these fees.
In many cases, condo fees are unavoidable, so it's best to set aside a portion of your budget for that. After all, there’s no use in acting like the purchase price is all you need to worry about. If you're paying such a fee to a condo association or Homeowner’s Association, or you plan on doing so, budget accordingly.
The best kinds of investors are those who prepare for change. Say your local Richmond government adds a few things to your neighborhood that you’re set to benefit from. Bigger, brighter lights, fire protection, road maintenance; these things won’t come free.
If your Homeowner’s Association spends more money than it would’ve wanted to on building repairs, that could dig into your pocket as well. Put some money aside to guarantee that when things change for the better, you can play your part as well. When special assessment tax comes knocking at your door, it's best to be ready.
Things break all the time, and it’s not always the tenant’s fault. Sometimes the weather is just a bit too harsh, a pump will burst out of nowhere, or the circuitry will malfunction. It’s important that you anticipate such incidents by budgeting for them in advance, because, chances are, you’ll be faced with one of these problems down the line.
You might say, “well, regular maintenance will take care of that.” But you will soon learn that while maintenance is absolutely important, it doesn’t help to depend on that alone. Yes, prevention is important, but some things are just out of our control.
It doesn’t matter how well-maintained your property is. Eventually, something will break. So put some cash away for repairs because the sooner you can have something fixed, the better. Some things will get damaged even more if they aren’t fixed quickly enough.
Tenants don’t like seeing a disorganized property owner, so if you don’t repair something in a timely manner, you could give off a bad impression and it might result in a bad review that’ll put future customers off.
Increase in Real Estate Taxes and Escrows
As the cost of living increases around the world, investors are met with much difficulty. Cities find they need more income as time goes by, and this results in increased property taxes. It is not just the value of your property that usually goes up; the tax levied against it will as well.
Since real estate tax goes towards the services that you expect from the government, it only makes sense to pay your share of property tax if you expect to reap the rewards of these services.
Escrow accounts are no different. You want to be sure there is enough money in them, so you don’t fall behind on your other financial obligations. Homeowner’s insurance, property tax; it will all be dealt with by the escrow.
Because a portion of the money in this account goes towards such expenses every month, you can rest assured that you’ll be able to pay them off completely at the end of the year. Since you may be forced to keep a minimum balance in your escrow account as a precaution against price increases, it would do you well to apportion a piece of your budget towards this.
Budget like a Boss
And just like that, you have all the tools needed to run a successful and sustainable investment property business. As a property investor, budgeting is a skill you will have to master If you don’t want money going down the drain.
The importance of planning for your money cannot be emphasized enough. Business calls for accountability, and what better way to be accountable than by drawing up a budget? Make sure to include property management into your budget as well, as a property manager will make your life easier by managing many of the difficult aspects of owning and operating the property.
Most importantly, keep the above four expenses in mind, try and predict any future price increases, and learn to put some money away for a rainy day. You never know when the roof is going to let in some water.