- Always do your homework first, before jumping into something big...
In the US, there are 8 million independent landlords who own 24 million rental units. Owning rental property is popular because it can be a highly lucrative investment—especially in the long run.
But first-time investors often overlook all the costs that come with owning rental property. As a result, their investment doesn’t do as well as they’d hoped. And sometimes, it can even turn out to be a liability.
So it’s important to know upfront what expenses you’ll face as a rental property owner. That way, you can run the numbers before you dive in—calculate whether the expected revenue will exceed the expenses, and then you’ll know if you can turn a profit.
That said, here are the seven most overlooked expenses of owning rental property that you should know:
- Property Taxes
As the property owner, you’re responsible for paying property taxes. They are the main source for funding local government expenses like schools. The property tax rate will vary by state, but you can count on it being anywhere from 0.28% to 2.49%. And typically, the rate is higher for a rental property than for a primary residence.
- Insurance
Rental property insurance protects you and your tenants from losses and damages. Though it’s not required by law, it’s required by banks to get a mortgage.
The cost of insurance varies widely by coverage, location, and property. But you can count on it being about 25% more expensive than equivalent homeowners insurance policies. This is because renters are more likely to cause insurance claims. After all, it’s not their property and they’re not the ones paying for the insurance.
Keep in mind that rates also tend to increase from year to year. And if you end up filing a claim, that will likely increase your premiums as well.
The best thing is to compare different policies to get the best rate and coverage. You’ll have to do some shopping around, but it’s well worth your time.
- Tenant Screening
Part of being a landlord is finding tenants. After all, you’ll need people to live in your rental units to make money. But not all tenants are the same. Do your due diligence to find residents who will respect both you and your property.
To do this, you’ll need to pay a tenant screening service to check prospective tenants’ background, criminal record, credit report, and rental history. These services all cost money that can add up quickly. Alternatively, you can use property management services in Sedona and they will take care of everything without breaking the bank. They can find you, and tenants, screen them, handle any local issues, and make your life as an investor in rental property much easier. They can even help you figure out anything you don’t know.
- Maintenance and Repairs
Many first-time owners don’t realize just how much maintenance and repair goes into being a landlord. Expect to deal with emergency power outages, erosion and water damage, and appliances breaking down, and more. It’s hard to predict when such things will happen, but the responsibility falls on you to have them fixed.
Of course, preventative maintenance plays a big part in minimizing the need for repairs as well. So don’t forget about regular inspections and deep cleaning. Then you can detect issues before they get worse and keep your units looking pristine. Plus, you want them to look spotless after tenants move out so that new tenants will want to move in.
Whether you hire contractors or handle it yourself, proper maintenance and repair work will always be necessary to maintain the value of your property and keep your tenants happy.
- Utilities
Utilities are another expense that falls on you as the property owner. These can include water, sewer, gas, trash, and internet. Of course, you can have your tenants pay for some or all of them, but you’ll need to establish that in the rental contract first.
To lower your utility costs, try getting energy-efficient windows and light bulbs and making sure the property has strong insulation so no heat or cold leaks out.
- Legal Expenses
Renting out property also requires creating a robust lease agreement and respecting the rights of your tenants. To do this, it’s best to get some professional legal advice. A lawyer can help you avoid liabilities and save money in the long run.
It’s also important to make sure your property complies with safety standards. Don’t leave any mold, lead paint, or asbestos unaddressed, or you could have a lawsuit on your hands and need to pay legal expenses.
In the worst cases, you may need to process an eviction. Though you never want it to come to this, sometimes it’s unavoidable. So expect to pay some legal fees associated with evictions as well.
According to Los Angeles evictions lawyer Devin Sawdayi, “before tenants can be evicted for nonpayment of rent, you must serve them with a 3-day notice to pay rent. After that period expires, you must file an unlawful detainer action in court and the tenant has five days to respond before a default judgment is taken.”
- Vacancies
Lastly, vacancies can be incredibly costly. If one of your units is left empty, you won’t make any rental income from it, which will hurt your overall revenue.
So be prepared for vacancies by using a realistic occupancy rate when calculating your expected rental income. And set aside funds for marketing your property as well. That way, when you do have a vacancy, you can fill it more quickly.
Final Thoughts
Well, there you have it! Now you’re better prepared to be a landlord, make cost assessments, and budget properly. If you want to make your life easier, use a rental calculator. And remember to outsource property management, maintenance, and repairs where you can to scale your business. If you do all that, you’re well on your way to cutting costs and maximizing profits.