Don't Kill Your Cash Flow and Return on Investment (ROI)!
The money in real estate is made up front, you make it when you buy, not when you sell! Buying right from motivated sellers, estate sales, bank foreclosures (REO's), HUD, Fannie Mae, Freddie Mac, as well as auctions is a good way to make sure you win the real estate game. After you have bought the right property at the right price, and in the right location, you have done much to secure a positive cash flow, hopefully with a bright future of appreciation, all while your tenant buys you a new home. However, there are some very important things you need to know that will kill your ROI if you are not careful:
- HOA fees can Kill Your Return on Investment: It's ok if you pay $200 per year to gain access to community pools, tennis courts and a great club house with a workout facility. However, if your property has a $200 per month fee, even if it includes, cable, garbage, water, sewer, insurance and landscaping, it's going to be hard to get tenants to pay a lot more for the rent, and you are likely going to take a hit on your return. Always make sure that you know whether a property has an HOA, get a disclosure that states the fees associated with it, how often they are collected and what they cover. Additionally, make sure you know the financial condition of the HOA, in many low income condos the HOA may be behind on water/sewer fees, due to owners who haven't paid, or have been foreclosed. This causes major problems, and can skyrocket the fees!
- Vacancy Will Decimate What Could Be Outstanding Returns: Usually just after rehabbing the property, it is a great idea to price the property a little bit below market rents to attract a flurry of activity and get an exceptional tenant quickly. Many owners price their property a little too high, not realizing that the month or two that the property sits vacant may cost them $1,600 in lost rents, while filling the unit $50 below market rent only costs them $600 the first year. While a property is vacant, it is more likely to have vandalism or theft, and in cold climate areas, there can be plumbing damages if the property has not been properly winterized. It's a good idea to also offer a discount for a 2 year lease or at least for an 18 month lease that strategically makes the property available during the best market conditions of the year for your area. Longer leases also make turn costs lower.
- Failing to Keep a Tenant Happy: Highly related to the vacancy tip just covered, it makes no sense to lose a great tenant that pays on time or even a late paying tenant who always pays late fees, because now you lose income, while also having repair costs, and you will get to pay the first month's rent to the management company for procuring a new tenant. It's much better to keep a tenant for three to five years, so that your carpet and paint go a lot further before needing replacement, and you don't have the lost income from vacancy and new tenant acquisition.
- High Property Taxes: Property taxes vary greatly from state to state, and this is a huge factor that effects how much money you put in your pocket! In Georgia on a $50,000 home you might pay $800 per year, and the same home in Alabama might cost you $400, but it could be $1,200 per year in New York! There is a big difference between $35 and $100 per month in property taxes, and it all affects your bottom line!
- High Insurance Costs: This also varies by state and even by zip code. High crime areas, or areas that have had a great deal of insurance claims due to natural disasters may cost a great deal more for home owners insurance. This may be as much as $75 per month difference from one investment market to another. Knowing what you will pay for home owners insurance before you enter an investment property helps you know what you will truly net in monthly cash flow.
- Property Management Costs: This is an absolute must for successful investors. While you may be able to manage a few properties on your own, if you budget the management fees into the acquisition costs of the property and only accept high returns including the provision of paying professional management, then you will always have a passive income. Ten percent is a fairly normal cost to pay, but if you are doing volume you should negotiate 8.5% and that is fairly standard when you have multiple properties. Over time this adds up, especially when you have several properties.
- Deferring Maintenance: While it may sound cheaper to put off repairs, many unattended repairs can cause much more serious costs later. When it comes to tenant safety, its a little more expensive to have smoke and carbon monoxide detectors, and to have non slip adhesive applied to exterior stairs, but in the long run it could save significant heart ache and expense. The property itself is another important area to pay attention to, making sure water drains away from the foundation and that gutters are not backed up can prevent very expensive mold situations as well as protect siding, sofits, fascia and gutter systems. Neglecting these areas can be much more expensive in the long run.
Learn how to do the right things the right ways, and follow these guidelines to make sure your investment projections come as close to netting you what you anticipate as possible! Call a Rich Life Real Estate Advisor to find out what you can do to succeed as an investor! 404-718-9126 www.richliferealestate.com.