Expenses for Real Estate Investment Properties in Southern California

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In an ideal world, every real estate investment would yield positive cash flow. It would be straight-forward and simple. Unfortunately, that is not the case in the real world. The reality is, every property is unique and must therefore be evaluated individually. There are many common expenses for real estate investment properties in Southern California to consider.

Predictable/Fixed Expenses

Fortunately, some expenses are fixed or at the very least predictable for a certain period of time.

Principal and Interest Payments

If you obtained a mortgage for your investment property and it’s a fixed-rate loan, then your principal and interest payments should remain the same for the life of the loan. If you obtained a variable rate loan, then the analysis becomes a little more complex. Variable rate loans typically have a fixed period (i.e. 5 or 7 years) and then an adjustment period. So, a 5-1-1 loan would have a fixed rate for the first five years. The rate is adjustable every 1 year and may increase up to 1%. A 5-1-2 ARM would be fixed for 5 years, may adjust every 1 year, and may increase by up to 2% each time.

Property Taxes

Property taxes are predictable for the current fiscal year. They are subject to future change, as decided by the local municipality. Some adjust the tax rate from year to year, while others may adjust assessed values of homes. Although taxes could technically increase or decrease on an annual basis, it’s rare that you see decreases these days. Most municipalities increase taxes over time.

Property Insurance

Insurance policies are typically issued annually. Therefore, the amount is predictable for a year at a time. It is certainly subject to future change based on many factors used by insurance companies. Be sure to take advantage of discount opportunities such as bundling policies.

Variable Expenses for Real Estate Investment Properties

Most operating expenses for real estate investment properties are variable in nature. Among them are utilities and maintenance/repairs. Here are a few common expenses to keep in mind.

Utilities

Utilities paid by a property owner versus tenant depends on metering. Tenants can be held responsible for separately metered utilities, whereas landlords are often responsible for combined meters. Additionally, landlords are responsible for common areas such as hallways and stairwells.

Trash Removal

If trash removal service is not provided by the municipality, then separate charges may apply. Landlords may be able to pass on this charge to tenants if calculated fairly to ensure that each tenant is only paying for his/her own trash removal.

Management Fees

You may opt to use a management company to take care of day-to-day operations such as performing exterior maintenance, collecting rent, paying utilities, etc. In this case, management fees will apply. Payment amounts and intervals will depend on your contract with the management company.

Maintenance & Repairs

All properties, whether old or new, will require some level of maintenance and repairs. It is extremely important to budget for these ahead of time. Some  will improve the value of the property whereas others will simply avoid bigger headaches in the future. This is probably the most uncertain of all the categories of expenses for real estate investment properties in Southern California. Here are a few common repairs that you may encounter:

  • Electrical Issues
  • Plumbing Leaks
  • Roof Leaks
  • Painting
  • Broken Appliances
  • HVAC Issues
  • Pest Infestations

Evaluating Operating Costs and Profits

Given that some expenses are fixed whereas others are variable, predicting profits and return on investment will never truly be precise. The key is to your knowledge and experience as a basis for your estimates. From property acquisition to maintenance, relying on the correct figures can make a big difference in the success of your investment.