Although we’d love it if this weren’t the case, you’re going to have to make a few assumptions to effectively evaluate your investments, be they real estate or otherwise. While other industries have their own set of rules, we’re going to tell you what you need to assume to invest in real estate. There are more, but these will get you started in your real estate career.
First, a good rule of thumb when dealing with assumptions is to recognize that they can (and often are) adjusted—typically, they’re adjusted in your favor because most people and companies are initially conservative. Think of assumptions as a set of well-researched projections. For example, you can expect six percent appreciation, a vacancy rate of eight percent (or one month per year).
Of course, this might not always be true. Jason Hartman initially owned one rental property in which tenants lived for nine years, no vacancy. It certainly happens, but you’re best off making a general assumption about what you can expect.
Another assumption you can make is that you’ll pay around ten percent of your rental income for someone to manage your income property. This means an easier life for you—no interaction with tenants, no additional problems. Paying around ten percent to property managements means your real estate income is truly passive.
Property management fees are certainly negotiable, but it isn’t necessarily a fee worth negotiating. Property management is not a high paying job. It is often thankless because people only call for problems. Paying around ten percent encourages property managers to lease your property before other properties they manage. This means fewer vacancies for you—paying a little more for a management fee means you aren’t stepping on dollars while picking up pennies.
You should assume that maintenance will cost you about two percent of your income on the property. Many properties are brand new, and many are rehabbed. For the first couple of years, maintenance costs will be low. Assuming two percent is probably overestimating, but it’s a safe place to start. (photo credit: MIT Technology Review en español via photopin cc)
The Jason Hartman Team