If you are a part-time landlord, you may be in for a rude awakening when it comes to capital expenditures for your rental(s). Often times, people who own rental property as an aside to their career come in to owning it without studying the long-term risks associated with owning investment property.
For example, you get married and move in with your spouse, but you hold onto your house and start to rent it out. It cash flows nicely, netting you around $400/month. Should you automatically act as if you’re going to earn an extra $5k/year? Of course not! No matter how high your profit margins are to make that $400/month, the $4,800/year you can expect to net can be completely accounted for with one medium sized problem.
One busted main water line, or one replacement roof or one dead furnace means that your entire yearly profit is now gone… and there are countless other examples.
Contrary to what some investors think, the issue only becomes more complicated and potentially more severe as you add to your rental portfolio. Even though you should be netting more money with each unit you add, you’re also increasing the statistical likelihood that you have a medium to large sized problem. If you aren’t putting away enough of your profits in a reserve account, one or two problems in a row could be devastating.
Even if you do put away money, consider that you may not be saving enough. Most investors should have at least $10,000 per unit stored in a savings account specifically to shield against the inevitable problems that come with owning investment real estate. Most investors have nowhere near $10k/unit. If you’re one of them, do not fear: it’s never too late to start saving.
Remember, owning investment real estate is a long-term play. You need to protect your investment as much as possible, which means to start building a mountain of cash to go along with sound legal advice & loads of insurance.