The Operating Budget

Just as you created a new line for each income opportunity for your property, you’ll create a new line item in your spreadsheet for each expense. In the sections that follow, I’ll list and describe most of the most typical expenses you will encounter with your new property.

MARKETING AND ADVERTISING

You can ask the property owner to show you the advertising costs for the past year and you may or may not get usable information. Better than that, ask the management company representative to give you an estimate of projected costs to advertise the property. He or she will know all the advertising vehicles in your market, the costs, and have a good feel for just how competitive the market is. You should know that as well, but the management company will put those abstractions into marketing dollars. The more competitors there are in your market, the more you need to advertise to get noticed. That costs more money

MANAGEMENT COSTS

Management costs include the fees you pay to a professional management company or the salaries and wages you pay to yourself or your own staff. Again, when you meet with your property management representative, this person can give you insight on how much your management fees will be, what maintenance costs you can expect, and the nature of those costs.

REPAIR AND MAINTENANCE COSTS

Repair and maintenance expenses will vary depending on your unit turnover or how many move-outs and move-ins you experience in a given year. Other factors that affect repair and maintenance costs are your resident profile, property condition, and the responsiveness of the manager to resident repair requests. If you keep your property in top condition, you will spend less in the long run on things like carpet cleaning, interior painting, electrical repairs, plumbing, appliance repairs, heating and air conditioning repairs and service. Landscaping, pool service and supplies, and pest control also fall under this category.

PROPERTY TAXES

There are two kinds of property taxes: real property taxes, which are on the real estate property, and personal property taxes, which are taxes on the contents of the property like refrigerators, stoves, dishwashers, and other appliances. There are two ways to get these numbers. First they are typically listed on the financials you receive from the owner, or you can get them from the tax assessor’s office. One thing to know is that taxes usually go up after you purchase the property because the assessors use the new purchase price as the new assessed value. Yet another reason to make sure you don’t overpay for the property! So when you are entering in the property tax costs into your analysis, you may want to inflate them. Your property tax team member can give you insight on how much to raise the tax costs.

INSURANCE

This is an important line item expense and it’s a critical one. Why? First, insurance is expensive, and second because usually the bank requires you to have insurance locked and loaded before signing the loan. This number is easy to get. Just call up a few insurance agents and get some quotes. The kind of insurance you will need includes property/casualty and general liability. Deductibles are what will make your insurance costs vary. We vary our deductibles depending on the property. As a rule, you’ll want to have insurance for the big things that can go wrong. You don’t want to pay high premiums for all the small things that you could afford to pay out of pocket. Talk with your insurance agent about the proper coverage for your property and the risks of having high deductibles.

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