What rarely-considered expenses do I need to budget for?

[Brianne H.]

Hello, I am interested in purchasing buy and hold out of state 2-4 unit properties in the next year. I understand when doing the math to calculate cash flow, after PITI, you still need to factor in property management, vacancy, and cap ex. However I'm wondering what other expenses have come up, perhaps on a yearly basis (or even less frequently) that I should be considering in my calculations? So far I'm thinking:

- Accounting/doing taxes (how much does this run you per year?)

- Travel expenses checking in on the properties every so often

- Software (Do you use it, or is that more for the PM? How much does it run you?) 

- ?? 

On a similar note, what amount do you keep in reserves per unit? (I'm assuming that's considering for vacancy, % of insurance deductible for the property, cap ex/planned upgrades, and emergency repairs - how much?) 

What else am I missing? 

[Ray Lai]

Great questions. Newbies often forget capex and maintenance, a lot of skeezy people like to send projections without it so glad that you know about it. The correct amount depends on your property type, if you have an older house it's more, if it's recently rehabbed, it's less. If you did a full rehab replacing the major things: HVAC, roof, plumbing, etc. then it's less. For reserves, it really depends to on the above, there's a big difference in buying a 2000 sq. ft SFH that is old, versus a small new-ish 800 sq. ft. home.

For software - if you have a good PM and they are managing and you have 2-4 units you don't need software per se, but it definitely helps. We're not allowed to promote our own software, but I know of a software in beta that's free that you can use to run financial projections for your units. Message me if you want it.

I have out of state properties where my PM uses Buildium and it has a decent interface for me. I've caught mistakes that my PM made and was able to tell them (e.g. double charge me on an item). If your PM uses no software, then you're in trouble. I'm assuming you have a PM if you're investing out of state since you're new. Not having a PM and being remote is pretty difficult but there are people that do it.

Reserves - again this really depends on the condition of your property. Your questions are pretty situational dependent so I'll just walk you through an example of one of my properties. Others will use different numbers.

865 sq. ft SFH, B-/C+ area, 3/1, built 1965 but all major cost items in great condition. I budget 1% of the property value (in my case $42000) as repairs. I use 2% of gross scheduled income (2% of 11400) for my reserves. Rent on the property is $950 a month (950 x 12 = 11400). My reserves are a bit low but that's because the big ticket items are in great condition. If I wanted to be conservative I'd do $2k. Again this is also in the Midwest where it's a lot cheaper labor/material wise.