Real estate requires a great deal of grit and determination, but those attributes alone won't see your deal through to the finish line. Foresight and an awareness of the bigger picture will help you navigate any unforeseen pitfalls.
There are any number of setbacks that can rear-up and sink your deal, so we are going to focus on the following three expenses that new agents tend to trip over when closing a deal: insurance, property management, and maintenance reserves.
If you are a seasoned veteran of real estate, this article may not be for you. But if you are a neophyte and hungry to learn, then listen close because these tips might just save your next deal.
1. Insurance Be warned! Do not overlook the insurance expense when analyzing a property. Get a quote for the insurance on the property long before you go to market. You should also consider questions like: Is the property in a high crime area? Is it in a flood zone? Was it built on an Indian burial ground?
These are important questions, and believe it or not, they have gone un-asked in the past and led to some pretty catastrophic moments in the history of deal-making. Don't be that guy or gal, so get an insurance quote!
2. Property Management Unless you intend to spend your time fixing sinks and trimming hedges, do not forget to include property management in your deal (Or don't!). It's important to know the risks and rewards of your decision though. If you do hire a property management company, it will cut into your revenue to a greater degree, but the property management company will also handle the expenses and labor attached to management activities. In other words, they'll fix that sink and pay for it too.
This will free up the time for you to make more deals, develop more properties, and do more of whatever it is you do. That's a solid approach if you intend to buy and sell properties quickly. However, if you're goal is to own several properties and rent them out, and you're up to the task of being the landlord, then managing your own properties might be for you.
You'll have a greater cash flow, but greater expenses. Regardless of what route you choose, forgetting to consider this and factoring in the expense is an out-and-out deal killer. You don't want that to be you.
3. Maintenance Reserves Finally we come to maintenance reserves. If you're new to the business, then this term may sound vague and inconsequential, but it's not. Maintenance reserves are extra funds set aside for a rainy day. They tend to cover things like vacancies, repairs, or big ticket items.
When times are good, or if you've just taken a loan and are parsing out a great deal of money, it can be easy to overlook this expense. Any seasoned real estate vet will tell you that you do so at your own peril.
Setting aside money for a maintenance reserve can feel like you're robbing yourself, but when disaster strikes, and it probably will, you'll be happy you factored in a maintenance reserve.