Expenses

6 Replies

Hi! This is Dina, Peter's partner (and wife!). We just introduced ourselves on BiggerPockets 2 days ago, and we warned everyone we have a bunch of questions...so, this is the first one that's been plaguing me. I'm a numbers person and love my spreadsheets and my formulas, so I've enjoyed running calculations (using the 50% rule) to practice evaluating properties. 

We know ultimately we have to replace estimates with real expense numbers, and we’re currently trying to figure out how to spread the overhead of running any business across a target property portfolio. The types of expenses we are grappling with are

  • subscription costs (to things like bigger pockets, loopnet etc)
  • software (quickbooks, property management)
  • professional fees (accountants and lawyers)
  • advertising
  • office costs (telephone numbers, web hosting)

Obviously the more properties we ultimately own the less these overhead costs will be an impact on expenses for any one property, but as you start with your first property, these expenses could very quickly wipe out any CoC ROI.

Any suggestions on how to factor these types of expenses in the profitability of a specific property?

Until you have REI income, there are no deductible expenses. The income is reported on the 1040 Sch E, along with the deductions - - in the first year of operations (and that means last years shopping spree is not deductible) .  

Even with a single SFR, the first year will have 'startup costs' and yes, the Sch E may show zero net profit if your purchase was thin and your expenses were out of control.

Boosting profits is about increasing income and reducing expenses, so out of the box, spend as little as possible (aka you don't need a website - - I did w/o for 19yrs).

when first starting out, don't pay for all these things :)

calculate what you need versus what others tell you that you need.

I've purchased a handful of houses and didn't have anything in your list. i have an excel sheet that stores all my data and runs my calculations. anything else would be too complex for my little real estate empire at this point. 

then again my wife says i'm cheap, so maybe i'll get a pro account here at some point.

with that said, make sure you capture all these expenses because they are tax deductible. 

@Jeff B. @William E. thanks for your answers. You're right. We should definitely be looking to minimize expenses as much as possible. Thankfully between us we have a lot of bookkeeping and IT experience so there are some costs we are comfortable in not having to incur, however the bigger expenses such as lawyers and accountants seem unavoidable, and from what I hear it is pretty important to get your name out there quickly and effectively through an online presence and advertising so you can pick up deals earlier than others.  Lawyers and accountants themselves could really make one particular deal seem unprofitable, even though if you end up making 4 or 5 deals in the year the cost is obviously spread out. 

Do you factor in all these costs against your first property or do you assume you will be successful in acquiring others and only factor in a percentage of the costs on the first property?

You shouldn't get into a dream because you think other deals can fix it. Every deal you do should be making you money. You should research hourly rates for lawyers in your area and then use BP to see how many hours of their time you'll need to factor in that expense. You shouldn't need an accountant right away, just like excel instead of QuickBooks you can defer those costs until you have too many properties to handle in excel. 

Follow the forums, always make your money when you buy (don't think you'll always make money in real estate if you buy now and hold it for a while unless you buy it under its intrinsic value), and make every deal count. Then you can add in expenses like QuickBooks and BP pro memberships when they are the only way to unimpede your deal flow. 

Sounds like you're asking about allocating overhead.  Here's my short answer:

Don't.

Instead, think in terms of Contribution Margin.  Overhead Allocations are spurious, confusing, and unnecessary.  

In your accounting divide expenses into Direct Variable, Indirect Variable, and Overhead.  The variable expenses can and should be allocated, but the Overhead should not be.  It's the fixed cost of being in business, and you need to know that instead of obscuring it with arbitrary allocations.

I can only guess you are/will attempt wholesaling and need exposure.  There are many reasons I would not use that approach (I'm B&H).  Like direct mailing campaigns, it's a lot of effort with a low return per deal.  Time between transactions will then yield a low YE PnL.  I think you see that from your initial posting.

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