One of your biggest responsibilities as a Houston landlord will be effectively managing and estimating costs. There are many costs associated with managing a property, from your monthly mortgage payments to ongoing repairs and maintenance, and how you estimate them will play into not only your bottom-line profitability, but also your effectiveness as a landlord.
Unfortunately, new landlords are especially likely to underestimate costs associated with their properties—and these underestimations can have negative consequences for your property portfolio.
The Consequences of Underestimation
Let’s start exploring this topic by looking at the consequences of underestimating your expenses.
- Property profitability. The obvious consequence here is the profitability of your property. If you estimate $15,000 in yearly expenses and $18,000 in yearly revenue, but your expenses end up being $16,500, your profits will be cut in half.
- Cash flow issues. In some cases, higher-than-expected expenses can lead to cash flow issues. You may be forced to pay bills you didn’t anticipate, exhausting your emergency fund and reducing your fiscal flexibility.
- Increased debt. If your expenses are high enough, they may even put you into further debt. While debt isn’t always a bad thing for property owners, if your debt grows to become unmanageable, it can hurt your financial strategy.
The Most Commonly Underestimated Costs
So what are the most commonly underestimated costs by Houston landlords?
- Vacancies. Vacancies are an issue for almost every landlord at some point, but many new landlords underestimate just how much of an impact they have. When your property is empty, it won’t be generating any revenue, meaning you won’t be enjoying any regular cash flow or profitability. Most landlords understand that when one tenant leaves, there’s usually a period of time before a new tenant moves in—but how long? If you estimate only a month, you may be shocked when it takes three or four months to find a new tenant. You can shorten vacancy periods by making your property more attractive, but the point remains—underestimating this potential expense can work against you.
- Tenant turnover. There are other costs associated with tenant turnover as well. Depending on the situation, you might have to pay to move things out of the property, finalize legal agreements, market the property, and put together a new lease. Ultimately, this can cost you hundreds, if not thousands of dollars.
- Post-tenant cleaning and repairs. You’ll also need to think about the repairs and cleaning you’ll need to do to the property after a tenant moves out. In some cases, you may be able to tap into the tenant’s deposit to cover these expenses; generally, this deposit is reserved to cover damage done by the tenant directly. In other cases, you’ll be bearing the full costs yourself. Getting the property back into renting shape can cost hundreds of dollars.
- Ongoing maintenance. It’s easy to think that your property will be easy to maintain, especially if you buy a newer home or issue renovations that make the property seem less susceptible to wear and tear. However, ongoing maintenance can be expensive and/or time consuming. On a regular basis, you’ll need to take care of the lawn, clean the exterior of the home, inspect appliances, replace filters and other mechanical parts, and watch for points of damage throughout the home.
- Unexpected damage. Speaking of damage, unexpected damage to the home can be devastating to your finances if you haven’t prepared for it. Sometimes, this is due to a natural event; a heavy hailstorm might cause enough damage to the roof to cause a leak. Other times, this is due to tenant actions; a problematic tenant might punch a hole in the wall or break one of your windows. In still other cases, these points of damage are due to simple wear and tear. In any case, you could be forced to pay hundreds to thousands of dollars for these repairs—and there’s no surefire way to predict when they’re going to arise, or if they’re going to arise.
- DIY repair and renovation projects. Many ambitious landlords attempt to do renovation and repair work themselves, in order to save money. If you’re handy and you have some experience in home repairs, this is a good idea. However, it’s easy to underestimate the costs of the materials you’re going to need. A $200 project can quickly become a $500 one.
- Legal issues and evictions. Though not especially common, you may occasionally have to deal with a legal problem related to a tenant, or manage an eviction. These legal issues can get complicated and expensive quickly, even if you haven’t done anything wrong.
How to Manage Unexpected Costs
If you’re interested in managing unexpected and higher-than-anticipated costs, there are a few strategies that can help you.
- Estimate conservatively. First, estimate as conservatively as possible. If you think the materials will cost $250, ballpark $300 or $350, just in case. Build yourself a buffer, so if the costs end up higher than expected, you’re prepared. If the costs end up lower than expected, it’s simply a nice surprise.
- Establish an emergency budget. Next, make sure to establish a robust emergency fund. This is something everyone should have, even if they aren’t a landlord, but as a property manager, yours will be even more important.
- Work with a property management firm. Finally, consider working with a property management firm. Property managers charge money based on the revenue your property is generating, so you can estimate these costs easily. From there, your managers will work to minimize vacancies, keep the property running smoothly, and allow you to make repairs and renovations as cheaply as possible.
If you’re interested in getting help managing your portfolio of Houston properties, or if you’re a new landlord who’s unsure where to start, contact us at Green Residential today! We have real estate agents and property managers who can help you get the greatest value from your Houston properties—and minimize the effort you have to expend personally to do it.