Have you ever heard of a successful business that did not have a yearly operating budget? A budget compared to the actual monthly income and expenses tells us if we are achieving our financial goal. As with any normal operation, the budget needs to be reviewed frequently and adjusted during the year. Without tracking and measuring your performance, it is hard to know how well your investment is doing.
Unfortunately, we hear many unprepared property owners complain about unforeseen maintenance expenses. Budgeting and setting expectations can help avoid surprises in property management. Some owners are happy to just cover the mortgage, more savvy investors want to look closer at all income and expenses to measure their investments’ performance. We can help you with understanding the ins and outs of your investment finances, so you are better prepared if issues arise.
Let’s get started. It is easiest to begin with fixed expenses:
Mortgage payments
Insurance premiums
Property taxes
HOA dues
Management Fees
Even with the most successful rental properties, and the best-qualified residents, sometimes unplanned life events happen. This could be a death in the family that causes relocation, it could be a job loss causing the resident to fall behind in payments. Hopefully, this will never happen, but it’s ideal to have two- or three-months worth of funds ready to cover these fixed expenses that otherwise could have been covered by rental income.
Variable expenses:
Repairs during occupancy
Utilities during vacancy
Landscaping during occupancy or vacancy
Make ready repairs during a vacancy
Cleaning to prepare for renting
It is wise to reserve approximately 10% of the monthly rental income for unexpected instances that an appliance fails during the lease term, whether it’s a minor repair like a garbage disposal or a more costly repair like a malfunctioning air conditioner. In addition to repairs during occupancy, you will have turnover costs. You do not want to rely solely on the security deposit to cover the costs of possible repairs and other costs of preparing the property for the next resident. Ensuring you have the proper funds set aside to handle these necessities will help smooth the way to keep the property running smoothly, keep your resident happy with quick repairs, or set you up to quickly prepare the property for the next renter so you can get back to earning a rental income.
Overall Investment performance
As far as measuring your investment’s performance, you need to look deeper than the monthly operating budget. A smart real estate investor frequently evaluates the bigger picture by looking at the yearly operating budget. Even if monthly, it seems that the expenses outweigh the income, that bigger picture reveals other ways your investment may be performing in your favor.
You need to consider your
Cashflow - this is the income you received minus the expenses you incurred during each month. This will be listed on your monthly statement from your property manager.
Mortgage Reduction: Do you know how to calculate this number? You are reducing the home loan on the property with every mortgage payment you make.
Your Tax Benefits are a direct deduction from your taxes thus money in your pocket.
Finally, you need to look at how your property is Appreciating and figure that unrealized gain when evaluating the success of your investment.
As your property manager, we would welcome the opportunity to sit down with you and figure out these numbers with you. We have tools and spreadsheets we can teach you how to use and send you home with. Master budgeting for your property investment and evaluate where you stand with confidence!
Contact us today.
Service Star Realty
2929 East Camelback Road #119, Phoenix, AZ 85016
(480) 426-9696
