Identifying the Top 7 Apartment Owner Mistakes
Welcome to the Real Estate Espresso Podcast, your morning shot at what’s new in the world of real estate investing. I’m Victor Menasce and in today’s show, we’re going to walk through the “Top 7 Apartment Owner Mistakes”, specifically focusing on the omissions that I see frequently in financial models. These mistakes tend to mislead owners and investors, resulting in underperforming investments.
Understanding the Top Apartment Owner Mistakes
The first common mistake we look at is the cost of unit turns which is often embedded in repairs and maintenance. The turnover cost is routinely underestimated, usually only including a quote for cleaning. A more precise accounting should also consider repairs and replacements associated with the turnover, including items such as paint and flooring, leading to costs anywhere from $1000 – $2000.
The second oversight often revolves around the actual cost of property management. Typically perceived as a single line item on the budget, this cost often overlooks added charges for services such as maintenance call-outs, leasing commissions and lease renewals.
Accounting and bookkeeping come up as the third error. An apartment building usually operates as a separate entity and there are overhead costs related to maintaining this entity, including tax filings, accounting and bookkeeping. These are actual expenses that need to be accounted for.
The fourth mistake lies in underestimating the cost of utilities. Whether tenant or owner paid, utility costs associated with common areas and water usage, in particular, are regularly underestimated.
Another often miscalculated expense is the regular upkeep of the property, including landscaping, common area cleaning, and snow removal. This regular maintenance has a significant impact on the property’s operating costs.
The insurance cost, coming up as the sixth mishap, can be very variable and is frequently underestimated. The type of coverage needed depends heavily on the type of property and this detail is often overlooked in financial models.
The final mistake is in determining the economic vacancy of the property. Modelers often understate the vacancy rate, ignoring the real-world costs associated with tenant turnovers and “professional tenants” who default on payments.
Moving Forward: Preventing these Mistakes
Upholding a precise and realistic financial model for your property requires the understanding and consideration of these frequently omitted factors. It’s crucial to remember that avoiding these oversights will not only help you meet your debt coverage ratio but also avoid negative cash flow and ultimately, make more successful investments.
| Checklist For Apartment Owners | Key Points to Remember |
|---|---|
| Accurate Turnover Costs | Include all associated costs, not just cleaning. |
| Realistic Property Management Costs | It is more than one simple line item |
| Detailed Accounting and Bookkeeping Budget | These are real expenses and need to be budgeted. |
| Thorough Understanding of Utility Bills | Ensure utility charges are correctly calculated according to usage and whether they are paid by the tenant or owner. |
| Appropriate Insurance Coverage | Insurance is not a one-size-fits-all deal. |
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