the-abcs-of-real-estate-investing-ken LifeFeeling

Before we leave the topic of income, let’s address future potential income. Recall that
future potential income is the total income the property could generate at today’s market
rents, 100 percent occupancy, and by taking full advantage of all other income
opportunities. You may find through your income verification process that the reported
rents are well below the market. This could be your “Advance to Boardwalk” card, so
keep it close to your vest. It’s this kind of upside potential that property investors dream
about. With income verified, it’s now time to turn our attention to expenses.
Step 2: Verify Expenses
Expenses are the second important variable to consider. As I mentioned earlier, the
definition of net operating income is income minus expenses. In the previous section, we
showed you the specifics you need to review to estimate the income potential of a property.
In this section, you’ll see how to assess the expenses.
Just as we did when we verified income, you’ll want to get a picture of the current
expenses. Unlike the income calculation where our goal was to be 100 percent on the
money in terms of accuracy, with expenses the goal is to get reasonably close. We’ll find
out all the minute details later in the game. This is another area where your team of pros can
help you.
Regardless of whether you will be using a property management company or not,
calling one to visit the property and help you assess everything involved in running the
place is a good idea, particularly if you are looking at a multi-unit building. Just call and
say, “I’m looking at buying an eight-unit building, and I’m not sure if I want to run it
myself or hire a company to do it. I’d like to show you the building and talk with you about
it.” The hour or so you spend with the property management representative will be a good
investment of time. And if you have to pay that person an hourly consulting fee, it’s worth
it. Make the objective of the meeting twofold. First, you’ll want to learn what it will take to
run the property, and second, you’ll want to get insight on how to minimize expenses.
Keep in mind, at this point in the process your goal is to get an idea of the ongoing
services and repairs as well as upgrades the building may need. Later in the process, you’ll
go into lots more detail. This is the time to put rough numbers on paper and analyze if the
cost of the needed repairs will still allow you to be profitable. There is a real balancing act
between spending enough to get the place in shape and overspending. Again, your property
management representative can help you determine many of these costs.
The goal throughout this whole exercise is to get a picture of where your expenses are
and try to find ways to do things better, smarter, and for less money. Those increase your
net income and increase your profitability. So what are the expenses? To answer that
question, we’ll turn to the pro forma expense table. It shows the seller’s anticipated
expenses for the coming year (the pro forma column) and the actual expenses for the prior
year. Here’s what this table looks like for the property in Phoenix we’re using as our realworld
example: