When you’re looking at a potential rental property, one of the biggest variables to effectively analyze are the costs of ownership. If you get those wrong, you could find yourself trapped in a negative cash flow situation.
If the listing agent or seller of a property gives you a P&L, that’s a good starting point, but take it with a grain of salt. On top of the vanilla expenses that show up everywhere, like taxes and landscaping, consider some other potentially hidden costs.
- Taxes
- Property Management Fees
- Agent Fees
- Special Assessments
- Water
- Sewer
- Utilities (including common areas)
- Trash & Recycling Pickup
- Snow Removal
- Capital Improvements/Expenses
- Insurance
- Vacancy Allowances
- Homeowner’s Association Fees
This is only some of the potential modifiers that could affect your cash flow, and you need to keep them in mind when you’re running your numbers.
I realize a lot of people are going to say “What about appreciation?”, and I do acknowledge there are other variables that can affect your decision. Personally, I don’t really factor appreciation into my process when I’m looking at a property to hold. If you’re banking on a future payout, you’re speculating, and I’ve seen many an investor get burned all the way to the bank on this kind of gambling.
There are cases where you want to see negative cash flow from a property… like if you have expenses from elsewhere in your portfolio you have to offset, but those situations are specific strategies, and outside the scope of what I’m talking about.
For majority of investors I deal with, especially new investors, the goal is to start the passive cash flow coming in. Missing hidden expenses can turn off that faucet quicker than you think, so be careful.