What Are Valid Expenses For Investment Real Estate?
When you are looking to buy real estate as an investment, one of the most important numbers you need to know is the Net Operating Income or NOI. That is the actual income after expenses (not including the mortgage payment).
Here are the some common expenses:
- Property Taxes
- Management Fees
- Utilities paid by the owner
- Lawn care
- Cleaning & Janitorial
- Legal and accounting
Sellers love to leave out Management Fees, repairs, maintenance and especially vacancy rates. In fact, it is quite common when you look at an investment property listing, the only fees the sellers include are Taxes, Insurance and Utilities. Then they work the Cap Rate or Cash on Cash return based on the NOI that is not realistic. They argue that you might do your own management or yard care. I say, if you do, you should be paid for it by a larger bottom line. These are valid and standard expenses and should be included to determine a realistic value.
It’s important for you to work your own numbers and determine your own Cap Rate and Cash on Cash return. Ask for the seller’s last couple years of his or her Schedule E. This is what expenses they deduct on their taxes. Granted, there are some write-offs for taxes that you aren’t going to use to determine an offer price, like travel expenses if the seller lives out of the area or depreciation. The most important item on the Schedule E is the true Gross Income. Don’t just take the seller at their word when they say, “It’s always rented.” The Schedule E will also show you what they are spending on repairs, lawn care, cleaning, etc.
There is no substitute for doing your own investigation! If you need help, contact me.