Buying Investment Property? Don’t Forget to Factor in These Expenses to Avoid a Money Pit

Buy a property, rent it out, collect rent checks every month, and you’re good to go to make a hefty profit, right?

Wrong.

There are a ton of expenses that you need to factor into the equation before you dive into an investment deal. Accurately estimating your operating expenses will give you a pretty good idea whether or not you’re investing in a potential gold mine or a money pit.

Mortgage and Interest

Unless you flat out buy the property in cash, you’ll probably have to finance it. The net profit you make doesn’t stop at the rent collected – you’ve got to deduct any mortgage you pay on a monthly basis. Of course, the principle portion of your mortgage payments goes towards the equity of your home, so you might not look at this money as an expense. Nevertheless, you still need to come up with this part of the mortgage every month.

The money that you won’t get back is the interest portion of your mortgage payments. Depending on what your loan rate is, your loan amount, and the amortization period, this portion of your mortgage can fluctuate a great deal. Regardless, it’s an expense you need to factor into the overall equation.

Maintenance Fees

It can be really challenging to figure out exactly how much it will cost you to maintain your rental property. Before tallying up each little expense, a general rule of thumb when it comes to maintenance fees is about 1% of the property’s value per year.

To illustrate, if your property is valued at $300,000, you’re looking at approximately $3,000 a year, or $250 a month for this expense. There are a bunch of factors that affect these costs, including the property’s size, age and condition.

Aside from the usual maintenance costs – like landscaping, snow removal and general repairs – you’ll also have to take into account larger maintenance expenses, such as roof replacement, window repairs, or painting. It’s important to remember all maintenance costs and repairs, both big and small, that you’ll be responsible for as an owner.

Homeowners Association (HOA) Fee

If the unit you are renting out is in a condominium, you’ll have to pay HOA – or condo fees. These fees, which are determined by the condominium’s board of directors, cover the cost to maintain the property, as well as the use of building amenities and common elements, including the gym, pool, lobby, elevators, party room, 24-concierge, and so forth.

Keep in mind that these fees can go up at any time. The board of directors regularly goes over the fees to make sure that the funds are enough to pay for current expenses, as well as saving up for possible future repairs.

Property Insurance

Regardless of whether the property you own is your primary residence or an investment property, you’ll still be stuck with an insurance bill. How much you pay in property insurance will depend on the type of contents that you want covered. Make sure you also factor in things like floods, earthquakes, pest damage, hurricanes, and other special insurance riders that you might want to be covered for.

Property Taxes

How much you’ll be paying in property taxes depends on a lot of factors, including your location and the size of your property. To find out exactly what you’ll be paying for your property, you can either contact your county’s assessor, or simply ask the seller’s real estate agent before you buy.

However, you might want to get numbers from both parties, as there is a chance that this number could significantly vary between what the county says and what the seller is currently paying.

Property Management

If you can’t manage the property yourself, you can always hire a project management company to do it for you. Tasks such as collecting rent checks, dealing with tenants’ queries, re-leasing the unit, and making periodic checks on the property can be done by these outsourced third parties – for a fee, of course. You’re usually looking at about 6% to 8% of the rental price to cover such costs.

There’s no doubt that owning investment property can definitely be a highly profitable endeavor. But you definitely can’t go in blindly. It’s important to take the time to jot down all the possible expenses you’ll be responsible for, which can be pretty far-reaching.

Your best bet? Talk to an experienced real estate agent who is seasoned in the world of buying investment property to get the low-down on all the expenses you’ll be responsible for.