Buying real estate as an investment is really exciting. There are so many opportunities to invest your money in solid properties that if managed properly can provide you with a steady stream of rental income and eventually provide a larger cash infusion when the property is sold!
And with so many television programs reveling in the thrill of the chase, it’s easy for most investors to get swept up in real estate fever. Which, I know, is a lot of fun and can provide you with so many opportunities to feel like a real estate mogul. Even if you only have one or two rental properties.
Of course, while the tv shows usually show you how to plan for all the exciting bits, the negotiation, and the purchase, they often don’t go into much detail about the everyday obligation of owning the investment property; and some of the expenses that can really catch you unprepared and drastically eat into your cash flow.
So, let’s look at some of the expenses that can sneak up on you once the thrill of the buy has faded.
I know what you’re thinking, there is no way I’ll forget to plan for maintenance expenses! And I believe you. The problem is that most new real estate investors think they can get away with the bare minimum and it comes back to bite, hard, later on. That’s why this one is right at the top. When you’re new to property investment that newness can lead you to be overly optimistic and ballpark something really low for you annual maintenance. The truth is that annual maintenance should be set around 10% of the rents in newer properties, and as high as 20% in older ones. If you’ve assumed anything below 10% prepare yourself for a cash flow problem down the road.
Never forget that your property needs to be managed and that there needs to be a cost attached to that management. If you decide to take advantage of a property management company you are usually looking at somewhere between 8 and 10% of the monthly rent for a single family home; possibly a bit less for a multi-unit building. The mistake that many new investors make is assuming that they can manage their property alone and for free. If you decide to manage the property yourself it’s important that you pay yourself a management fee for a couple of reasons. First, you are going to be putting a minimum of 12 hours a week into the management, so you should feel you are being compensated for that. I know you’re simply paying yourself, but often that’s enough to help keep you motivated. Second, should you decide down the road that you’ve had enough of doing it yourself and would rather simply enjoy being a property investor, you will have already budgeted for the expense of a property manager appropriately.
No property investment show spends much time talking about what happens if you don’t have a tenant in your property. However, it’s a guarantee in real estate investing that at some point you are going to have a vacancy. And there is a cost to that. A great rule of thumb is to put aside 5% as a sort of vacancy insurance. That way, if you have a space between renters, you’re covered. If it happens that you’re vacant two or three months every five years you’ve got the money in the bank for that. Of course, if you’re investing in a university area or just know the vacancy rate could be higher yo
The Lessor Expenses
Planning for all the little expenses is important if you’re getting into property investment. Otherwise, it can feel like death by a thousand cuts. When making up your budget be sure to include a line item for all these little (and sometimes not so little) costs.
Rental Licence Expense
In Vancouver, you have to pay each year for a rental license. If you have a single dwelling being rented out the license will cost you $61 per year. Now, if it’s a duplex you have to pay that $61 for each of the two dwelling units, provided you’re not living in one of them. And of course, if you decide to carve a house up into an apartment-house you can expect to pay $63 for each unit you’re renting to someone other than yourself.
Not only is this going to eat up a big chunk of time, it will cost you in processing fees if you do it right. And believe me, you want to do it right. Credit checks and the like can run you $40 each on top of your time investment. There are a few landlord associations in BC that you can join, for a fee, that can give you deals on credit checks but they are still not free. Of course, even if you manage the property yourself, you may want to engage a property management company to handle the screening process for you. A bad tenant can really take the fun out of real estate investing. Be sure to take your time and do it right.
These are the worst of the worst sort of costs. If you can avoid ever having to go through an eviction, do that! It’s going to zap money and time and could sour you on what is a really awesome investment opportunity. Which is why I can’t stress enough how important tenant screening is. An eviction has the potential to wipe out huge amounts of your profit and leave you feeling pretty deflated. You should assume probably five months worth of rent will go into getting rid of one bad tenant and build your war chest accordingly. When you consider legal costs, vacancy, unpaid rent, and repairs you want to ensure you’re covered. You may also want to build in the price of a really nice bottle of wine, for celebrating when it’s all over.
When you get into real estate investing and decide to manage the property yourself, you are essentially setting up your own small (or maybe not so small business). This means you are going to have to afford for the little incidentals required to keep your business going.
Don’t assume you can do this one for free. Sure you can list your rental on Facebook, Craigslist, and Kijiji but you may want to spend a bit and have it listed on a professional property site. This helps start the screening process right from the get go.
Assuming you don’t live in the property, where you are also renting out units, you will need to be driving out to inspect and maintain your investment. Many new owners don’t tend to think about this as much of an expense, but you will see over time, how it adds up. Also, just the process of tracking this cost will give you an idea of its effect on your bottom line; as well as making it easier to substantiate when it comes time to include it as a tax write-off.
Sure, you got a free personal chequing account, don’t expect that for your business. Banks charge full price for business accounts. You’re looking at paying $50 a month just regular business banking. And then it’s likely they are going to ding you pretty good for cheques and other services. Be sure to shop around before opening your account.
It goes without saying that you are going to need to have a computer and printer for your business. There will be leases and letters to print and ink cartridges or toner to replace. You will also need to have paper, envelopes, labels, and stamps. All of which add up over time. And then, of course, there is the bookkeeping. You can use something like Microsoft Excel to track your expenses but, more likely you are going to want to use a program like QuickBooks to provide you with a little more ease and sophistication.
And while you may manage to track expenses and keep the books in good order, you’re going to want to spend the money come tax time to make sure everything is in order and that your personal and business money is kept appropriately separate. Spending a few hundred dollars up front to have this all in proper order can save you all sorts of headaches later with Revenue Canada.