NUTS & BOLTS
ACCOUNTING
Estimating Operating Expenses AN UNDERSTANDING OF EXPENSES AND CATEGORIZATION WILL HELP REAL ESTATE INVESTORS ANALYZE POTENTIAL OPPORTUNITIES. n previous articles, we have covered the need to under- stand terms, concepts and fundamentals of cash-flow analysis, as well as how to estimate effective gross income, oper- ating expenses and net operating income. This third installment in our series focuses your attention on operating expenses, which are those paid by a real estate in- vestor to keep the property generating revenues on a monthly basis. Operating expenses do not include mortgage payments, depreciation or capital improvements. The table below illustrates some of the typical operating expense categories for a standard residential rental property. These account categories were taken from the default operating expense settings fromThe Property Ledger™, the cloud-based real estate investment software developed exclusively to assist the average real estate inves- tor in analyzing real estate investment opportunities. The most common operating expenses as they relate to resi- dential real estate include: PROPERTY TAXES Represents the property taxes that you as a property owner will pay on an annual basis related to state, county and municipal government, as well as for school district operations. You may obtain a property’s current property tax bill by going online to the respective county’s treasurer or county assessor’s website and searching for the property’s tax bill by parcel number, owner or address. Remember, when you purchase a property at a price higher than that paid by the previous owner, your property tax payment will increase from what is shown on the current tax bill. Make sure you take this into account when estimating your prospective investment’s property tax payment or you may underestimate this expense. In I by Carter Froelich, CPA
my mind, it is always better to be conservative and select a higher number when estimating operating expenses. PROPERTY INSURANCE Property insurance is necessary to protect both you and your lender from loss in case of fire, flood, earth- quake or any other catastrophe that may damage or destroy your investment property. It also includes liability insurance to protect you in the case that a tenant or tenant’s guest is injured while on your property. As is the case with property taxes, if you are paying more for a property than the original owner did, your insurance premiums will likely be higher than those of the current owner. Call your property insurance specialist and provide the details related to your purchase, along with the coverage you desire for the property. The specialist will then be able to give you an exact quote related to this expense category. REPAIRS AND MAINTENANCE Repairs represent the items that need to be fixed over the course of a tenant’s use and include such things as leaky sinks, heating and cooling repairs, minor plumbing repairs and electrical or appliance repairs. They basically represent those costs necessary to keep everything running for the tenant’s use of the facility. They do not include replacement of an air-conditioning unit, remodeling of a bathroom, replacement of windows or other additions that increase the useful life of the property. MANAGEMENT FEES Management fees represent the fees paid to an outside party to manage and lease your property. Typically, these rates range from 6 percent to 30 percent of the effective gross income generated by the property and are dependent upon the type and location of the property. Even if you manage the property yourself, you should factor in a management fee, as your time is valuable and you should recognize the cost of your time. I can assure you that when the time comes to sell your property, should you present your property’s profit and loss (“P&L”) statement to a prospective buyer and a management fee is not shown on your P&L, that the buyer will add one to his or her analysis, thus increasing the operating costs of the property and thus reducing the price the buyer will pay for the property. UTILITIES Utilities relate to electricity, natural gas, heating oil, water, sewer and potentially trash pickup. Depending upon the type of property you are analyzing, the tenant may pay a majority of these costs. I know that for all my single-family residential units, the
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learned about his home through one of the gyms purchased it, and he did buy the new homeowner a one-year gym membership. He feels the offer was a key factor in the sale. Gene Caballero had a similar experience. “When I was selling my house in the suburbs and moving into the city, I really didn’t need my car,” he says. “I parked it in the front with a big sign, ‘Car Comes with the House!’” The house sold in three days, and Caballero handed over the keys to his 2-year-old Nissan Maxima along with the keys to his house. Get creative. Besides gym member- ships and cars, you could offer such things as monthly spa treatments, season tickets for the local sports team, a one- year membership to the local country club or even a vacation. CREATE A WEBSITE Give your home more than just an MLS listing—set up a website for it. The website is a canvas that showcases more than photographs and features. You can use it to tell a story that hooks buyers, says Spencer Callaghan with Thornley
Fallis Communications. For example, you could write a blog detailing the significant days spent in the house, such as the day you moved in or the day you plant- ed the rose bushes in the backyard. “Make it funny, sweet, maybe even tug at the heartstrings a bit, but weave in details about the house itself,” he says. Amplify your efforts by using social media. Post on Facebook, Twitter and YouTube. Include your dedicated website on all fliers and
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$199,900 listing. You don’t have to wear a costume, though, for a creative marketing cam- paign. (In fact, if too many people adopt the tactic, it will lose its impact.) You could place cutouts of celebrities in your home photos or maybe place an item in one of the photographs and make a picto- rial search for that item in the postings. The idea is to get creative. The more creative you are, potentially, the more interest your ad will generate. •
7 6 marketing materials so buyers can learn more about your property and, hope- fully, become emotionally attached to it through your stories. WEAR A PANDA SUIT OK, maybe it doesn’t have to be a panda suit, but gimmicks can work. Just ask Texas real estate agent Jessica Arnett, who donned a panda suit after reading about an English agent who did the same thing. According to Realtor.com, the
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Carter Froelich, CPA, is the founder of the Web-based real estate investment software The Property Ledger™. To get a free, 30-day trial of The Property Ledger™, visit the website at www.thepropertyledger.com.
tactic generated 12 showings in two days (compared to two showings in the previ- ous three weeks) for the four-bedroom,
Teresa Bitler is a regular freelance contributor to Think Realty Magazine. Contact her at teresa@teresabitler.com
98 | think realty magazine september :: october 2016
thinkrealty . com / mag | 99
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