Owning property is not as simple as we might perceive it to be. When we think of buying property and renting it, we automatically conclude that it’s easy, not time consuming and doesn’t need sophisticated management. But what about rental income that flows into property investors accounts? What you earn from renting your property is your income. How you use that income can be the defining factor of whether you succeed at being a real estate investor or not.
Some of us think buying a property and managing it is as simple as it gets. I used to think the same. You buy the property, rent it and wait for the money to flow in every month. However, there are three important factors to consider when deciding how much of your rental income you need to put away for contingencies.
1. Maintenance Costs
If you are investing in a real estate property and you are already planning on renting it, you might as well accept the fact that repairs and maintenance are unavoidable expenses. The costs of repairs are of course dependable on the property you own. For example, a newly renovated house will need fewer repairs than an old house that has some flaws, in it that need to be addressed every now and then.
Contacting a local contractor to get an estimate of the costs of repairs and maintenance for your property is the right thing to do for future budget planning in that particular area. If the contractor estimates the costs of repairs for a property you own at $4,000 per year on average. You should be able to take that into account as you calculate your rental income for the year; how much of that income you can spend and how much of it you will need to put aside for expenses like repairs, mortgages and other reserve expenses.
2. Tenant Screenings
When planning on renting your property on a long term period as a steady and easy source of income, it is highly advisable to conduct tenant screenings. These screenings will allow you as a property owner to know what kind of tenants you are dealing with and if you can trust them with your property or not. There are two negative aspects that might take a serious hit at your rental income savings if the tenants are not abiding by your rules or causing damage to your property.
First, a bad tenant can cause damages to the property that might require the owner to pay hefty amounts of money for repairs, so it is always a better option to conduct interviews with potential tenants, know more about them and most importantly charge them with a security deposit in case of any potential damages. Secondly, some tenants are just hard to deal with because of their inability to adhere to the rules or contracts made that you are forced to evict them. This will create some unnecessary expenses for the owner which might include legal fees to evict, difficulties finding a replacement in a shorter amount of time and potential fees for agencies that act as third parties between owners and tenants. Tenant screenings and interviewing strangers is a daunting task for anyone, but it is a necessary one if you are to limit the risks on your rental income and how much of it you save for yourself.
3. Unrented Property
This is a possibility all investors and owners might have to consider however scary that thought of not being able to get rental income might be. This is an important and vital part for any investor or owner because it helps in future planning.
Let’s look at it this way, an owner is renting his property for 9 months of the year, but there are 3 months that are considered off-season. That makes it hard for him to find someone to rent his property during that time period. The owner must have thought about that potential risk during the 9 months where he accumulated rental income, he should’ve put some money aside for a contingency as severe as this one. The owner still owns the property even though its not rented or not generating income, the expenses are still there. Taxes, mortgages and maybe even repairs are still expenses he has to deal with at a time when no income is flowing through his accounts.
To be successful in managing your property, you need to be well prepared. In order to expand your real estate investments you need to be perfectly organized. As I mentioned before, it is not as simple as we might think it is. Rental income is not only a source of spending to sustain a property owner’s lifestyle or to gratify their needs. It is a source of consistent cash flow that should be well planned and organized to help you expand your ventures, being prepared and to develop yourself on the path of real estate success.
Don’t forget to use Mashvisor’s investment property calculator to help you with your financial planning instead of using spreadsheets!