When you find a rental property that has a stellar location and the right numbers you are on track to running a lucrative rental business!
A big advantage of real estate investments over other types of investments is your ability to estimate your ROI (rate of return).
Having said that, your Orlando, Florida investment ROI depends heavily on the numbers you start with. If you make an uninformed decision right at the beginning, like buying in the wrong location, then your ROI will likely suffer in the future.
We have listed the most common mistakes real estate investors make when running their numbers. Hopefully, after reading this, you can avoid them when budgeting your property.
1. Underestimating the Vacancy Rate
Don’t make the mistake of assuming that your property will always be occupied. As such, when budgeting your property, make sure you make an allowance for vacancies.
Realistically, budget for at least 7 % to 9% of the rent as a vacancy rate. If your property is located in a popular rental market, you can probably decrease this amount.
Just goes to show that location is an important factor to consider when it comes to real estate investments. The location alone can make all the difference.
2. Not Considering Your Exit Costs
As a property investor, your exit strategy should be included in your business plan. For those of you that may not know, an exit strategy is your intention to remove yourself from the investment. By planning your exit strategy beforehand, you allow yourself to assess the risks associated with real estate investment. It can also help you avoid these risks.
An important part of your exit strategy should be calculating your exit costs.
A common mistake property investors’ make is not understanding how equity works. Now, suppose your Orlando, FL rental property is worth $200,000 and owe your bank $130,000.
You might believe you are supposed to have $70,000 in equity. Unfortunately, that’s not how it works.
You see, there are other costs that you have to factor in as well, like the closing costs. When selling your property, you should expect to pay 6% to 10% of your property’s price at settlement. This money will be taken from your profit on your real estate investment.
With that in mind, the equity from our calculation above would be $50,000. ($70,000 – 10/100×200,000). That’s what would you’d expect to realistically walk away with if you sell the property traditionally.
3. Thinking That You Can Manage Your Property Yourself
This is a mistake that many beginner real estate investors make when budgeting their rental property. Owning an income property is one thing while managing it is another.
Managing a property isn’t only about collecting rent at the end of the month. There are a lot more responsibilities included in managing an income property.
To name a few; receiving 3 a.m. phone calls from tenants, screening tenants, educating yourself on the Federal Fair Housing Rules, keeping up-to-date on the federal, state and local laws in regard to landlord-tenant laws, etc.…
The truth of the matter is being a landlord to your own investment isn’t easy. That’s why many rental property owners turn to property management companies to manage their Orlando properties.
However, if you do choose to manage your investment yourself, don’t sell yourself short. You’ll still have to include the property management fees in your budget.
You’ll want to budget a minimum of 10% of rent for this, unless you discover the company you hire requires extra fees.
4. Misjudging Repairs and Capital Expenditures
As a real estate investor, you have to be prepared for the unexpected. Your property can only handle so much for so long. As such, have a budget for repairs and capital expenditures. When running these numbers, it would be wise to take the age of your property into account. As older properties usually require more upgrades or replacements.
Budgeting about 8% for repairs and capital expenditure is usually sufficient when running your investment numbers. Of course, you’ll be disappointed when those contractor bills come knocking your door but at least you’ll be prepared.
A lot of beginner landlords are over optimistic about repairs. Believing that their costs will be replaced the following year. Except, what happens if the next year something else needs to be replaced or upgraded?
5. Not Budgeting for Routine Maintenance
Maintenance costs usually peak during tenant turnovers, as everything will need to be ready for the next tenant.
Reducing the tenant turnover rate is, therefore, of utmost importance. In essence, the lower it is, the more of your income you get to save. So, come up with a plan on how you are going to retain your Orlando tenants.
Generally, maintenance tasks involve doing things like recarpeting, repainting, reflooring, and refinishing.
Regardless of the effort you put into retaining your tenants, you should still put money away for your property’s maintenance. Five percent is usually enough to do the job.
6. Forgetting About Miscellaneous and Administrative Costs
As a landlord, it’s inevitable that you’ll run into a slew of other trivial expenses. While they may be small, they can quickly add up into significant expenses. So, as you budget for the rest, make sure to include them as well.
Different miscellaneous costs you should consider include:
- Traveling to visit your properties
- Touring properties for sale
- Legal fees
- Registration Fees
- Accounting and bookkeeping fees
- Homeowners Association expenses
Little by little, everything adds up.
So, how much should you put towards miscellaneous and administrative costs? Well, 2% to 4% usually works out well.
There you have it. Six mistakes real estate investors make when running the numbers on their Orlando, FL rental property. Avoid them and you’ll be on your way to a successful real estate investment journey.