The only reason to buy a single-family home as an investment is to make money with it. And you can’t make money if you don’t have a tight handle on your expenses. And too many buyers do not put sufficient padding to cover the costs of converting a home from resident-owned to a rental property. Here are some things that buyers miss.
Property Tax Reassessment
Every time a house sells, it notifies the tax assessor, who then re-values the home based on current values. And the seller – if it was their homestead – may have the home on the books at a low value and with the seller’s personal exemption, which makes the taxes far lower than they will be after you buy it. The only safe way to approach this situation is to get the exact tax rates from the tax assessor and then apply the price you are paying to get the actual tax you may be charged.
Property Management Fees of 6% to 10%
First-time home investors often forget to take into account the property management fee, which can range from 6% to 10% of gross revenue. Since you may live out-of-state or simply elect to let somebody else handle the renting, collecting and maintenance of the home, you will be paying a property management company to do this work for you. And that’s a significant amount of money in fees. Make sure you have this taken into account or your budget will be very far off.
Reasonable Repair & Maintenance Estimates
One problem that some home investors get involved in is to underestimate the repair and maintenance cost of the house they are investing in. One formula that has proven fairly accurate over time is that you should set aside $1 for every 1 square foot of home size as the repair and maintenance budget. For example, a 1,500 square foot home would have a repair budget of $1,500 per year. Again, this is just a guideline, but it will definitely get you in the ballpark – and is much higher than what a first-time home owner will estimate.
Be sure to use proper estimates in constructing your budget or you may find that you have no way to hit your budgeted rates of return. Since the price you pay is based on the assumptions of net income, if you do not budget correctly for expenses you will most certainly overpay for the home.