Do Not Forget These Expenses in Your Profitability Analysis

When investors search for deals on the Internet or elsewhere, they can be fooled by property descriptions deliberately left empty by advertisers or brokers.

Many expenses are left out because, let’s be honest, we would reject many properties right off the bat.

That being said, you need to analyze all the recurring expenses to accurately estimate the property’s profitability, whether it is residential or commercial.

Here is a fairly complete but not exhaustive list of your recurring expenses, which can be left out of the property description.

  1. Property Tax: Usually, this expense is in the property description. Sometimes, the municipal and school tax notices are also in the presentation of the property. Most cities have a website where you can access the property’s assessment rolls and taxes by researching the address or the lot number.
  2. Insurance: This expense is rarely in the property description, and, when it is, it is not always true to the real amount. You are better off asking for proof of what the current owner paid the previous years. Be careful, owners can have one insurance premium for all their properties, which can make the calculation more difficult. In this case, you can ask for an estimate based on the information you have.
  3. Electricity, Heat, and Fuel: Depending on who pays for these services (owner or tenant), the property’s profitability can change drastically. You should know this information and check the invoices to see if the consumption is abnormally low or high, which tells you more about the insulation and the tenants’ consumption. Older buildings, unless they were renovated, usually consume more or use an old heating system.
  4. Snow Removal and Lawn Care: These expenses are rarely in the description, but they should still be taken into account. You will have to determine if you will take care of these tasks, if you will hire a professional, or if you will ask your tenants to help in exchange for a discount on their rent. The cost depends on the size of your property, but it rarely exceeds $1000.
  5. Maintenance and Repairs: Even if the building is in perfect condition, and the inspector did not detect any defects, you should still set a budget for the property’s maintenance. This way, you can make sure that people still want to live in your building and that it continues to appreciate every year. Moreover, unexpected breakage will most likely occur, and you will undoubtedly regret not having planned it in your budget.
  6. Management: You should anticipate the expenses for management, accounting, and bookkeeping. These expenses usually amount to about 3% of your income.
  7. Telecommunications: If you pay for cable, telephone, and internet services, you should add these expenses to your analysis. Usually, as with electricity, heat, and water, paying for these services will increase your income.
  8. Janitorial Service: If you pay for a janitor, whether it is an hourly or a fixed wage, you should foresee this expense.
  9. Garbage Removal: You might have to pay for the appropriate services to dispose of big furniture and appliances.
  10. Others and Unexpected Expenses: To pay for anything you cannot plan, such as unexpected events, overuse of services, severe damage, fines, etc., you should put aside a certain amount, between 1 and 5% of your income, as to not be caught off guard.

In conclusion, it is better to be prepared for the worst, so you do not get any surprises or headaches once you purchase the property. Of course, this list is not exhaustive; there are other expenses, which depend on various factors, to take into account. Nonetheless, the list gives you a good idea of the recurring expenses you should consider in your profitability analysis. An online software like iAnalyzeREI can help you complete this step thoroughly… Why not give it a try?

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