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Maintaining a healthy operating budget is an important business practice that all real estate investors should learn how to master. After all, if you do not set a firm budget, the risk of overspending on a project or an investment and taking on more debt than you can manage greatly increases.
However, when it comes to budgeting, enough is never enough. The world is full of hidden costs and fees that can pop up and force you to spend hundreds or even thousands of dollars more than you planned for at the drop of a hat. While you may be able to cover these costs through equity and other financing means, drawing on that cash can occasionally take time that you may not have at the moment. So instead, you need to be budgeting extra so that these unexpected costs do not catch you unprepared.
However, before you dive to deep into your budgeting plans, let us help you determine how much you need to be budgeting by setting you up with a pre-approval. All you need to do is click the link below to book your free strategy call and we will get you started from there.
Budgeting Extra for Purchases
Whenever you are planning to buy a property in order to expand your investment portfolio, take a moment to look at how much you have budgeted for the purchase. While a quick glance at the number may show that your budget is perfectly set, this does not account for any additional expenses that you may incur along the way.
One of the largest reasons that investors may suddenly find that they have not budgeted enough to buy a specific property is bidding wars. After all, if the market is hot or the property is in-demand, you should be planning to compete with offers from other buyers. This will occasionally mean forking out extra money to secure a property that you really want.
Closing Costs and Hidden Costs
At the end of the buying process, you should always expect to pay more than the final purchase price of the property. After all, there are plenty of closing costs and other hidden fees that you will need to consider.
This includes lawyer fees, land transfer taxes, appraisal fees and more. While these costs usually fall between one and three per cent of the final purchase price of the property, they can occasionally trend higher, notably if you a buying a property with a lien put on it that you may need to pay off in order to complete the transfer if the seller cannot pay for it themselves. So, you should always aim to have more than expected for closing costs when buying a property.
Discover How To Analyze a Properties Cash Flow With This Step By Step Guide
Larger Down Payments
Occasionally, the specifics of a property or you own financial situation may require you to have a larger down payment than expected in order to buy a property. For example, instead of the usual 20 per cent for a mortgage of 80 per cent LTV (loan-to-value), your lender may ask that you pay 30 per cent for a mortgage in order to buy it because they will only finance the property at 70 per cent LTV.
Budgeting Extra for Maintenance, Repairs and Renovations
When you go to update or make repairs to a property, there are plenty of hidden costs or potential moments where the money you have saved up may suddenly not cover the entirety of the job unless you are budgeting more than you expect to spend for the work. Some of the reasons you may need this extra money are:
Expected Damages and Repairs
Sometimes when you go to make an improvement to one part of a property, you may suddenly find that other problems were hiding just under the surface. This is common during repairs that take place near plumbing fixtures. For example, if you are replacing the counter and cabinets in a kitchen, it is possible that you may find signs of water damage or mold buildup from minor leaks or damages to the pipes that you will need to repair as well. These can increase the overall cost of a particular renovation by quite a bit.
Another major cause of inflated repair costs is the need to extend a deadline due to unforeseen circumstances. For example, if you planned for a renovation to take place over three weeks, but a particular part you need for the plumbing or a certain material you want to build with is on back order for an extra two weeks, that is time that the property will be stuck in an unfinished state and will not be making you any money, while also costing you more to retain the contractors for the remainder of the job.
Budgeting Extra for Property Expenses
Another time you need to make sure that you have extra funds available for your real estate investments is when you are planning your operating budget. While it would be amazing if your expenses could stay the same all the time, sometimes circumstances may change, and the amount of money required to keep things afloat will shift.
Vacancy and Turnover
Unexpected vacancies or tenant turnover can be horrible for cash flow and straining on the budget. After all, you suddenly have an entire unit or property that is no bringing in any income, but still has all of its expenses intact. To prepare for this, try to keep enough funds in your budget for an extra unit or two more than you expect to have vacant so that you do not fall behind on any bills or payments.
Rising Interest Rates
Finally, if interest rates suddenly rise, your monthly payments may go up depending on your mortgage. As a result, some properties that were producing narrow cash flow margins or producing a negative cash flow while you farmed equity will suddenly cost more to run and you will need to spend more to keep your portfolio afloat.
Fortunately, to decrease the pressure that interest rates put on your budget, our agents at LendCity are here to help you secure the most stable mortgage products available so regardless of circumstances, you have the best shot at keeping operating costs under control.
To get started today, visit us at LendCity.ca or give us a call at 519-960-0370. Alternatively, click the link below to book a free strategy call with our team at LendCity to learn more about how you can be budgeting for your next down payment and how to leverage your existing properties while budgeting.