Every single expense you encounter as a real estate investor ultimately comes out of your ROI. That’s why it’s so important to be prepared for any costs and expenses you might encounter. I often find that there are three big expenses that many investors overlook.
If you skip the important step of figuring expenses into your ROI formula, you’ll be disappointed! Factor in these things ahead of time, so you aren’t surprised if and when they occur.
Vacancy expenses. Every real estate investor WILL have a vacancy at one time or another. People move, things happen, it’s just part of the business. And when your tenant moves out, you’ll have to conduct a tenant turnover. Depending on the amount of work that needs to be done, and how long it takes to find the right tenant, it could be a few months. I always account for 5% vacancies in my ROI formula.
Property management expenses. Having a property management team on your side is an absolute must! Hand over these duties to a professional who understands what they’re doing, and be prepared to pay for their expertise! The industry standard is around 10% of your monthly rental income.
Maintenance expenses. If you own your home, you know that things break from time to time. A rental property is no different. It’s wishful thinking to assume you won’t have expenses. I like to set aside at least one month’s rent to cover any expenses. Because we do extensive rehabs, I typically don’t have any huge expenses, but little things do come up occasionally, and you want to be prepared just in case!
If you want to be as prepared as possible, take these expenses into account. Figure them into your ROI formula, conservatively.