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Real Estate Investments: How Much Room Should You Leave in Overhead?

by Brandon · 4 comments

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Today I wanted to feature an original article written just for RealEstateinYourTwenties.com by a fellow blogger Nick over at Movoto Real Estate. If you haven’t heard of Movoto or subscribed to their blog – I highly recommend you head over to Movoto.com/blog and check it out. Highly entertaining and great information. You can even calculate how much it would cost to send your home into orbit or how much it would cost to buy Mr. Rogers’ home.  So without further suspense – here’s Nick with “How Much Room Should You Leave in Overhead?”

Real Estate Investments: How Much Room Should You Leave in Overhead?

If you’re like many individuals new to real estate investing, you probably have little to no idea what overhead is. What you should know, however, is that overhead costs are one thing you want to understand and estimate before investing in a property.

What is Overhead Anyways?

Overhead is the sum of the recurring expenses relating to your property, otherwise known as your operating costs. This can included fixed costs–those that stay the same each month–as well as variable expenses like maintenance that vary from month to month.

Overhead costs typically include:

  • Mortgage payments
  • Property taxes
  • Insurance
  • Maintenance costs

How to Estimate Your Overhead

Assuming you’re planning to invest in a residential property, the best way to figure out how much room to leave in overhead is by estimating all of your costs. Your smartest option is to estimate these costs on the higher end, which will give you leeway for unforeseeable fees.

Overhead can be calculated the same way you added up the regular costs before buying your current home. You’ll want to tally up all the potential fees pertaining to your property you would need to cover in a typical month. Here are a few general tips:

Overhead is typically estimated between 35 to 80 percent of your gross operating income.
Generally the closer the property is to being in the “luxury” category, the higher the operating costs will be.

Mortgage Payment

Like owning your own home, buying a residence as an investment probably means you’ll have to take out a mortgage to help pay for your property.

Thus you will also have monthly mortgage payments to cover. The best way to estimate this number is to talk with your lender or get pre-qualified. Pre-qualification will help you find out what size mortgage you can afford, and from there you can calculate the average monthly payment.

Property Taxes

Property taxes are determined by the local government and based on the property’s value. The average tax rate is about 1.5 percent of the property’s value per year, but it varies by state. For example, in California the average rate is 0.68 percent, while in Texas it’s 2.57 percent.

If you can’t obtain this number from the current property owner or agent selling the property, you should contact the county assessor.

Insurance

Your insurance agent should be able to give you an estimate of this expense. All you need to do is contact him or her and provide details about the property.

Remember to calculate this on the higher side, and consider whether you need insurance for things such as earthquakes and floods.

Maintenance and Other Costs

While this amount is often the most difficult to estimate, you can follow a general rule of thumb: Maintenance will equate to around one percent of the property value per year. So for a $200,000 property, you should estimate $2,000 for maintenance per year.

Other costs you may need to calculate include:

  • Homeowners Associations (HOA) fees. You can find these by looking at the listing or calling the current property manager
  • Management. If you plan on having a manager for your properties, you’ll need to add in the cost of their services
  • Gardening
  • Pest control
  • Utilities

The Government’s Helping Hand

You should also keep in mind that your real estate investment guarantees you a number of tax reductions, including:

  • Interest: Mortgage interest payments for a loan pertaining to your property is tax deductible, as well as the interest on credit cards that you use to pay for goods and services relating to your rental.
  • Depreciation: Because the value of your home depreciates over time, you can deduct a portion of the property’s value on your taxes. This is a set amount for every year that you own it, not a single transaction that can be deducted in one year.
  • Repairs: Any repair costs for your property are fully deductible in the year in which you paid for them.
  • Insurance: Premiums for almost any insurance you cover for your property are tax deductible, including fire, theft, and flood insurance.
  • Travel: Any travel expenses you incur can be deducted, such as gas expenses for local travel or airfare and hotel bills for longer distances.

But don’t rely on these deductions to make your operating expenses affordable. If your overhead estimate is out of your price range, chances are the property you’re interested in is riskier than your potential profit is worth.

 

Image courtesy of [image creator name] / FreeDigitalPhotos.net

About Brandon

has written 199 Awesome posts in this blog.

Brandon Turner (G+) is the BiggerPockets.com Senior Editor and Community Director and owner of RealEstateInYourTwenties.com. He is also an Active Real Estate Investor (Flips, Apartments, and Buy-and-Hold), Entrepreneur, World Traveler, Third-Person Speaker, and Husband. Come hang out with him on Twitter!

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

P.S. Looking for more real estate investing knowledge? If you are interested in a top-notch course to help you understand the nuts and bolts of creative real estate investing, I would like to recommend Ben Leybovich's Cash Flow Freedom University. Ben is a close friend and has been my trusted adviser for years. He's a smart guy and CFFU is pretty awesome. The course is waitlisted, but while you wait for an opening Ben will send you tons of FREE content. Seriously. Click here to check it out.

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{ 4 comments… read them below or add one }

thek100 October 20, 2012 at 5:14 am

This is great and impressive post really…i search this type of topic and really appreciate it.

Reply

Joe White October 31, 2012 at 8:30 pm

I have a client that attempted his 1st flip and had no idea of his numbers…
He hired me as his real estate agent to sell his property, but could only get the house 80% completed….

With out a stove, paint and several other basics we were forced to sell only to investors, meaning those cash buyers.

Luckily I was able to sell the house and he made a small, profit, but hardly worth his trouble.

Going forward he is attempting it again….this time, relying upon me, his agent to obtain as many numbers as possible.

I’m going to forward him this article! Excellent!

Reply

Luxury Apartments Gurgaon November 7, 2012 at 10:49 am

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Affordable residential properties Gurgaon November 19, 2012 at 7:48 am

Very interesting Article. Keep it up.

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