Real Es­tate 101: Don’t for­get to re­mem­ber your ex­penses

Calhoun Times - - BUSINESS NEWS - Real Es­tate 101

and then the profit amounts from $ 165,000.

This was a great start, I told him, but there were some other costs he needed to ac­count for such as real­tor fees, clos­ing costs and hold­ing costs.

You see, every time you sell a prop­erty, you put about 11 per­cent of the sales price to­ward real­tor com­mis­sions and clos­ing costs. For this house, that is an ad­di­tional $ 18,150 that the in­vestor hadn’t fac­tored into his of­fer.

If he had stayed with that of­fer, he would’ve re­duced his profit by 60 per­cent after he cov­ered com­mis­sions and clos­ing costs. And to quote the char­ac­ter Jack Spar­row from “Pi­rates of the Caribbean,” that would be “Not good!”

Next, I was speak­ing with an in­vestor who was about to turn a prop­erty into his first rental. He fig­ured he could rent the house for $ 1,100 a month. And since his mort­gage pay­ment was $ 500, he was ex­pect­ing a monthly cash flow of $ 600.

On a deal where the mort­gage pay­ment is closer to the rent rate, ac­count­ing this way can get a land­lord into trou­ble real quick. Let me ex­plain.

The cost of do­ing busi­ness as­so­ci­ated with a rental prop­erty is unique in that, other than the mort­gage pay­ment, most of the things you have to pay for are not fixed. Nor are they paid on a rou­tine ba­sis.

Be­cause of that, you have to an­tic­i­pate those costs and pay them to your­self monthly so that you have funds ready when an un­fore­seen event, like a wa­ter heater break, takes place. You do this by tak­ing a per­cent­age of the gross rents and set­ting them aside. We re­fer to this prac­tice as tak­ing into ac­count the ex­pense fac­tor.

The costs you are try­ing to an­tic­i­pate are prop­erty taxes and in­sur­ance as well as both cur­rent and fu­ture re­pairs. The ex­pense fac­tor should also ac­count for the in­evitable va­cancy that will oc­cur when you have ten­ant turnover.

Be­cause there is so much vari­abil­ity in those fac­tors that is prop­erty spe­cific, the ex­pense fac­tor is some­thing you will need to cal­cu­late for your­self. But for our busi­ness, in our area, and on most of our prop­er­ties, we set aside 35 per­cent of the gross rents to cover our ex­pense fac­tor.

Us­ing that num­ber on the house that rented for $ 1,100 means you will only have $ 715 com­ing in after the ex­pense fac­tor is de­ducted. Tak­ing out the mort­gage leaves $ 215 a month. That’s not a bad deal, but it’s a far cry from the $ 600 they were hop­ing for.

So if you’re flip­ping a prop­erty or you in­tend to keep it and rent it out, don’t for­get to re­mem­ber your ex­penses when you eval­u­ate the deal.

Joe and Ash­ley English buy houses and mo­bile homes in North­west Ge­or­gia. For more in­for­ma­tion or to ask a ques­tion, go to www. cash­flowwith­joe. com or call Joe at 678986- 6813.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.