Biggest Hidden Expenses for Real Estate Investors

Biggest Hidden Expenses for Real Estate Investors

The three big hidden expenses
of real estate investing, that’s today’s video. Let’s dive in. Hey, there, I’m Clayton Morris. I’m the founder
of Morris Invest. Thank you so much for
subscribing to my channel. We publish real estate videos
multiple times per week all around helping you
create passive income and to get out there and take
action and become a real estate investor. Today, I want to talk about
some of the hidden expenses that you can expect as a buy
and hold real estate investor. Now I’m not talking about
the obvious things, right? Tenant turnover, I’m
not talking about. I’m not talking
about lawn care– not going to talk about
those obvious things. We should all know that
those are some expenses– lawyer fees, closing costs
on a property, etc.– that’s obvious stuff. I’m talking about things
that can kind of creep up, if you don’t take
account for them in your real estate
investing journey. Now on all the
properties that I buy and that we do with
my company, we’re figuring these numbers
in ahead of time so that I’m not surprised. And at the end of the year, if
I don’t have these expenses, guess what? More money in the bank for me. So I want to build these
things in ahead of time. All right. The first one is
vacancy expenses. Now a lot of people
don’t really think to roll in vacancy into their
number, but that’s a number that I figure into
my ROI formula– vacancy, repairs, expenses. You want to figure at least– in my towns where I’m at,
I have about a 5% vacancy rate in the city, but
that’s different than your own personal vacancy rate. You want to make sure you
are accounting for vacancies in your own formula. You know, we can look at
different high vacancy towns, right, like different places
like Memphis with high vacancy rates, et cetera or
Little Rock, Arkansas– places like that
with high crime– but that’s totally different
than the vacancy rate on your personal property
and the vacancy rate that you need to account for. So for instance, if you
own a single-family home– which most of the properties I
buy are single family homes– you’re going to have a vacancy. If there’s a
turnover, let’s say, of a tenant that’s lived
there for five years and a tenant moves out and
you’ve got three months where there’s a vacancy while you’re
getting the drywall patched up, carpet cleaned by your property
management team, et cetera, well, then, you’re going to
have a percentage of your time. You’re never going to be 100%
full so you need to account. I would definitely
account for 5%– 5% in my vacancy number,
too, for my overall formula when I’m purchasing a house. Make sure you add in 5%
for your vacancy number– at least 5%. That way there are no surprises. Number two on the
list– and I’m always surprised that people
do this– they leave out one of the most important
things in your whole real estate investing journey– and that’s
property management expenses. So you must, must, must
have your properties managed by someone other than you. Do not go down the
rabbit hole of trying to manage your growing
portfolio yourself. Now eventually, that’s
something you can do on your own by hiring the right people. You build your own office
and have your own property management team– that’s down the road. You should have it
handled by a professional and a typical property
management company is going to charge
between 8% and 10% a month of your monthly rent. That is standard. And now occasionally, if it’s a
large building, maybe 100 units or more, it may be
lower than that– but chances are it’s going
to be between 8% and 10%. That is totally standard. So you’re going to
want to make sure that you’re accounting for that
number in your ROI formula, as well. So you got 10% for property
management, 5% for vacancy and that brings us to the
next one on our list– maintenance expenses. People don’t account
for expenses. And again, I do
that in my formula– vacancy, repairs and expenses. You want to put that
into your formula. So maintenance expenses–
what does that look like? Well, try to
account for at least a month’s rent for
your expenses per year. Now if you buy a house
that’s fully rehabbed or all the main mechanicals
have been updated, the furnace, the water heater,
the roof is in great shape, the windows are
great, the electric’s been updated and plumbing,
then you’re not going to have those huge expenses. Now if you have
additional things that you’re buying–
maybe you’re buying in A-class
neighborhoods– which I never do and I have a video
right here on why I only love buying in C-class
neighborhoods– then you’re going to have
more things to fix, right? Maybe a garage door opener. Maybe you’re even applying–
giving them their appliances, you know, dishwasher,
those sorts of things that you’re going to end up fixing– the refrigerator. So you’re adding a level of
sophistication and expenses on top. That’s not something I worry
about so you need to make sure that you’re accounting
for maintenance expenses– just putting that money aside–
but here’s the best part– if you’re buying a
property that you know is already going to be done
and rehabbed and taken care of, then you’re not going to have
these expenses to worry about. And so while you’re
still accounting for them at the end of the year when
you look at your spreadsheet, you’re going to say, oh, we
had no expenses this year. We didn’t have to fix anything. For 2, 3, 5, 10 years, we
didn’t have to fix anything. Great. So we saved that additional
money or we put that aside just to be safe and then you’re
golden because you didn’t actually spend that money. So the big three– vacancies, property management,
and maintenance expenses. Please account for those
when you are picking up your first rental property. I do and you should, too. Thank you so much
for subscribing. If you’re not a subscriber,
click the Subscribe bubble right over there. And please check out all
of the other great videos and playlists we have
here on the channel. I’d love to hear your feedback. You can always comment
in the thread below– in the description field below. And we’ll see you
back here next time with another video, everyone. Have a great one. Go out there, take action, and
become a real estate investor.

10 thoughts on “Biggest Hidden Expenses for Real Estate Investors

  1. First.

  2. Do you keep the $ you put aside for maintenance and vacancies separate for each home, or pool them all in the LLC that owns them?

  3. Hey Clayton how come you don't invest in Ohio?

  4. Clayton, I see your competitors are advertising that they have a "Better" method for slicing bread than you…..which brings up an interesting question, How does the investor Know with any certainty that the home they are buying from you or your competitors is actually a Fair price for that market? I realize you buy low, fix and flip then I buy from you and rent. Now you need to make a profit after you've done all the fixing…. that's cool but when I come along and buy the home from you at $40-50k, how do i know I am not getting hosed or that I am buying at a less than full market value?

  5. thoes three items you're speaking of. Are they added in the 40% you always talk about thanks. I enjoy your channel.

  6. Cant we require the tenants to take care of lawns and maintenance to the house at least if its minor things

  7. What would you say about Capital Expenditures? Are you expecting that to come from leftover maintenance $$

  8. Great video! But is it only me getting dizzy with the shaking background?

  9. Do you buy major appliances for your homes? Dish washer, stove, fridge, etc..?

  10. Is the 10% management expense taking into account tenant placement fees? I hear it's often the first month's rent.

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