Basic categories to an investor’s budget
Depending on how much your buyer puts down and what type of home loan they are working with, mortgage rates range from 3 to 4 percent interest, according to national average data from Freddie Mac for July 2017. Mortgage payments are one of the most reliable expenses to budget in a home purchase.
Property taxes vary by state, county, and city, with the average American household spending $2,149 on property taxes for their homes each year, according to the U.S. Census Bureau. While property taxes can change due to local levies, they are generally considered a fixed expense for an investor’s budget. There are several tax benefits for real estate investors, including appreciation and several deductions.
Insurance policies designed specifically for renter-occupied homes will protect an investor from financial loss and obligations associated with a rental property. Oftentimes, a standard homeowner’s policy is insufficient for an investor’s property. Landlord insurance can include dwelling coverage, liability coverage, personal property coverage, loss of income coverage, flood coverage, acts of nature coverage, and legal fee coverage.
An investor can expect to pay about 25 percent more than you would for homeowners insurance for a basic policy, with rates varying according to your geography, property age, deductible, coverage limits, and more, according to realtor.com®.
Rental property owners can decide which utilities to cover and which to defer to the tenant. If a rental agreement requires a tenant to cover all utilities like water, sewer, electricity, trash services, cable, and internet, an investor will improve his or her profit margins. However, some municipalities require that the owner of the home pay for certain services, like sewer, so it’s worth double-checking.
In some instances, even without city requirements in place, it will make sense for an investor to provide certain utilities for the renters. For items like trash, sewer, and internet, these can be planned, fixed expenses, while water and electricity can vary based on usage.
Home maintenance for rental properties can be one of the hardest expenses to budget. The reason property maintenance is difficult to estimate is the variability of this expense category. A landlord may spend $200 in one month for a leaky sink, $0 the next month, and $500 the following month on an appliance repair. Over time, maintenance expenses tend to average out but a smart investor will create a generous estimated budget in order to prepare a reserve fund to cover unexpected bills.
6. The Bottom Line
Most categories within an investor’s budget will be based on a percentage of a home’s purchase price, like mortgage, taxes, and insurance. Other expenses can be estimated based on the management style an investor chooses and how much maintenance a home will require. Give your buyer an idea of this budget equation for a profitable investment as a starting point for an investment property purchase price.
SEPTEMBER 2017 | BY KAYCEE WEGENER Full Article Full Article