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6 Variable Real Estate Expenses To Tweak For Multifamily Homes
To any businessman, keeping the business in the black is as simple as 2 factors. Increase revenue and decrease expenses. While opportunistic business people go all out to maximize revenue, less gung-ho business people spend their time meticulously scrutinizing expenses.
By crunching numbers over time, you will get a feel of expenses on a per-square-foot basis. Compare that with the rental per-square-foot, you can quickly work out your expenses budget and target revenue to reach your income goals. When your apartments are fully rented out, you can say that you have hit maximum revenue unless you have a plan to creatively generate additional income. That’s a topic for another day. Let’s now focus on variable expenses to play with when you have hit your revenue ceiling.
Maintenance and repairs. The costs and frequency required to maintain a building depends on the age and condition of it. If it is your first time, taking over a building, you are most likely to spend about 10% to 20% of revenue on this expense. As you get the hang of it, you want to scale it down closer to 10%. Neglect maintenance at your own peril. Tenants pay premium rentals for premium service. If you are not interested in providing the highest quality service to improve the lives of your tenants, don’t expect them to pay premium rental.
Employee salaries. You are either going to become the operating manager of your properties or hire someone to play that role. And under this position, you will need a few more staff to fill in. The key person is the manager. If you decide on hiring a manager to free up yourself, note that you do not want total salaries to eat up more than 5% to 8% of your revenue. You will need to have a big list of holdings to justify hiring someone with top dollars. Because when you have just 10 apartments, you can pretty much do everything yourself just by making full use of the phone.
Utilities. You don’t need to be a smart investor to learn that it is best to charge the utilities to the tenants. When tenants do not pay for what they use, there is a tendency to abuse water and electrical usage. However, in some circumstances, you simply do not have the property metered system to track usage of each individual apartment. If setting up individual metering systems are too costly for you, then you have to go for a fee that is included in the rent. Take it a step further by installing devices that conserve utility usage.
Management companies. When you are unable to get anything done during the day because of having to attend to your properties, it could be time to hire a management company to take over. These operators usually charge a percentage of about 3% to 8% on your revenue. If you don’t think managing your building is that complicated, don’t be afraid to negotiate for the lower end of fees. With their expertise, they make everything look effortless. Getting your business is just additional income without much work.
Tax. Property taxes are usually calculated based on the market value of your property. And market value is usually determined by the market rental rates. As different territories will have different legislation governing taxes, it is best to check with your accountant on tax issues. You will probably have little control over property tax. However, when calculating corporate tax, it is when you find out whether you accountant is worth his salary.
Insurance. If there is an expense that is a must, it is insurance. You will know why when something bad happens to your property. Just like car insurance where the premium can differ widely, the same goes for insurance for your investment. Commercial insurance can look like a different animal altogether to the average man. There are many fancy names and ways coverage is presented. Just like taxes, insurance can greatly differ from country to country, you have to call up your insurance agent to find out what suits you best. The important point to note is to compare between different insurers. You might be pleasantly surprised to find an insurer quoting a very competitive premium for just that little less coverage.