Anyone buying real estate as an investment knows the type of rigorous financial analysis necessary to make sure that the individual investment property will be profitable for the duration of the holding period. When running your numbers it is critical that the investor avoid underestimating expenses or a cash flow positive property could quickly become cash flow negative. Most investors can determine the upfront costs and common expenses associated with buying a property pretty accurately but occasionally they miss some of the some hidden costs or expenses that can creep up after settlement. This article will identify 4 hidden costs that can pop up after purchasing an investment that can have a profound effect on your bottom line.
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1.) Rise in Condo/HOA Fee:
When you buy a property that is part of condominium association or home owners association (HOA) you will almost always pay a condominium fee or HOA fee that covers your share of the expenses for the comment elements of the property. Sellers and associations are required to make financial disclosures to buyers with respect to the condo/HOA’s budget and the individual unit’s annual or monthly obligation so the buyer should be well informed as to what amount is due monthly, quarterly or annually. What some buyers fail to understand is that condo/HOA fees increase over time as expenses like insurance and building staff salaries increase. To be safe, research the property’s condo/HOA fee history to see what the average annual increase has been historically or budget a reasonable annual or biannual increase into your projections.
2.) Special Assessments:
Special assessments are fees assessed by the condominium or HOA, in addition to the monthly condo/HOA fee, that are used to pay for a capital improvement or major repair that the condo/HOA does not have sufficient funds saved in its reserves to cover. Typically special assessments are for major exterior improvements like roofs, windows and the like. Special assessments can range from a few thousand per property to tens of thousands per property spread out over several years. Avoid special assessments by purchasing in buildings that are in pristine condition, are well capitalized, and that carry warranties on as many systems and building elements as possible.
3.) Unforeseen Repairs:
Most investors will use past experience to budget for general maintenance and upkeep of their properties but every buyer must do all they can to prevent unforeseen repair expenses. Buyers can be proactive by performing inspections and reviewing the seller’s disclosure prior to settlement but it is almost to account for the unexpected. The best course of action is to set aside a healthy reserve and obtain a sufficient amount of home owner’s insurance for each property you acquire. Some investors also choose to carry home warranties that cover appliances and systems. These types of warranties can be purchased for a few hundred dollars and renewed on an annual basis and have proven to be well worth the cost.
4.) Increase in Real Estate Taxes and Escrows:
Property taxes usually go up and rarely go down, especially in economic environments like the one we currently find ourselves in since cities, counties and municipalities need an influx of revenue. Most investors budget for annual increases in taxes but occasionally cities, states, municipalities, or neighborhood associations change taxation structures, assessment methods or millage rates which can result in larger than normal taxes increases. Keep an eye on the local news with regard to taxes to make sure your target neighborhood doesn’t have any major changes in the works. Another item to note is that as property taxes and insurance go up so do escrows and thus your monthly mortgage payment. Be careful if that property you’re considering only cash flows $200-$300/month because that money can get eaten up very quickly as taxes, insurance and escrows increase and you could get stuck with a break even property or worse.
Avoiding the hidden costs that can pop up after you purchase an investment property will help you keep your properties profitable and your portfolio growing!