Real estate is a lucrative industry. Owning a profitable rental property business can be a ticket to an early retirement and a tried-and-true source of generational wealth.
As with other ventures, the key to a successful real estate investment is keeping expenses in check. Everybody knows the popular ones — appraisal fees, closing costs, mortgage payments, property taxes — but they tend to overshadow other important ones.
Here are seven lesser-known expenses aspiring landlords must take into account.
1. Tenant Screening
Tenant screening reports are to landlords what credit reports are to lenders. They may contain critical information about prospective renters — like rental history, credit data and employment verification.
These reports may even say whether a person is an ex-convict, a registered sex offender or a known terrorist. Savvy rental property owners rely on informative tenant screening reports to identify and deny bad applicants housing for legitimate business reasons.
Landlords can run rental background checks using third-party services or hire brokers to find and screen candidates. Either way, there’s a fee. Brokers price their services based on duties, whereas tenant screening services generally charge per request and by report extensiveness.
Other things being equal, paying money per screening is more cost-effective. Landlords may have to spend more money when using a broker in exchange for convenience. Whether the extra cost is worthwhile depends on how profitable one’s property rental business is.
2. Property Management
Being a landlord is a full-time job. They must be available for tenants around the clock to respond to time-sensitive situations like a leaky roof, a clogged toilet or a broken window. Being on call 24/7 can be demanding and may be humanly impossible for absentee landlords. That’s why lessors can benefit considerably from hiring a property manager.
A property management company handles the everyday operations of a rental property. It has the resources to deliver timely maintenance responses to keep occupants happy and help retain them. It handles and legally navigates disputes using its knowledge of relevant laws and regulations to protect the landlord’s business interests.
When a tenant leaves — even at a moment’s notice — a property manager has the means to find a trustworthy replacement soonest to maintain positive cash flow.
Property management companies are godsends to real estate investors who want to own rentals without dealing with the inconveniences of being a landlord. Property managers want a significant portion of the monthly rent for their services. Property management fees vary by location, although it’s reasonable to expect to pay more in a hot market.
3. Maintenance
Fledgling landlords know they’re responsible for the upkeep of their units. Yet, many are unaware of how stressful and costly maintenance duties can be. Rental property owners have to mentally and financially prepare for four types of maintenance — emergency, preventative, seasonal and pre-occupancy.
Emergency maintenance refers to repair requests on short notice that need urgent attention. Preventative maintenance is work done to keep the property livable — like changing carbon monoxide and smoke alarms and replacing the dishwasher filter. Seasonable maintenance is about inspections and fixes to boost the rental’s resistance to weather. Pre-occupancy maintenance ensures the space is ready before the lessor hands over the keys to a new occupant.
Factors complicating the job will drive up rental property maintenance costs. For example, an estimate for crawl space mold remediation may be higher than usual when insulation removal is necessary. On average, insulation removal and disposal costs between $0.60 and $0.80 per square foot. New insulation installation can set a property owner back $1.45 to $1.65 per square foot, depending on the product’s type and R-value. Finally, the cost of mold removal ranges from $2 to $2.50 per square foot.
Maintenance costs are unavoidable but reducible. Establishing relationships with local contractors and promising long-term recurring business can help rental property owners negotiate for better deals.
4. Utilities
Rental property owners are partly responsible for utilities like water and sewer, increasing monthly expenses by tens to hundreds of dollars. Location and usage determine how high they go. Landlords may add the cost of other utilities into the rent or pass the payment duties on to occupants to increase their net profit.
5. Homeowners Association (HOA) Fees
HOA charges — which can go more than one thousand dollars per month — are standard when owning a condo unit, an apartment or a property in a planned community. Some neighborhoods consisting of single-family homes may also impose these fees on residents. For these reasons, aspiring real estate investors must be mindful of these charges regardless of the property they buy.
Homeowners pay these dues to cover the maintenance costs of common areas — like lobbies and elevators — and build a community clubhouse, swimming pools and other amenities everybody can enjoy. Having said that, HOA fees can offset some utilities — like garbage disposal, water and sewer.
6. Landlord Insurance
Rental property owners will find this insurance invaluable, but it usually costs more than homeowners insurance. Landlord insurance provides coverage for common perils plus tenant-caused damage.
It generally applies to the structure only because its contents mainly belong to the occupant. A lessor with multiple doors must get separate policies, affecting the total cost of the insurance.
Furthermore, a rental property owner may pay for extra coverage if they furnish the unit and include personally owned items their tenant can use during their stay.
Likewise, landlord insurance can protect its policyholder from loss of rent when the property is unfit for occupancy due to repairs and medical expenses someone may incur when injured on the unit. Personal liability limits are flexible, so a lessor can pay extra for added protection.
7. Vacancy
Vacancy cost is revenue lost due to an unoccupied unit — an irregular expense budding landlords should note. It can be challenging to minimize because the market forces behind tenant turnover can be beyond the control of rental property owners.
Losing a revenue stream due to vacancy can be devastating for beginners in real estate investing. Landlords with large portfolios typically have adequate resources to weather financial storms and ride out vacancy periods than investors who own just one or two doors.
Fortunately, there are ways to minimize lost revenue due to vacancies — doing proper research and using a property manager. Check historical rental vacancy rate data to determine what time of year rental units tend to be unoccupied in a particular location. This activity can reveal seasonal patterns, making it easy to predict which months will have the highest turnover.
After understanding tenant turnover trends, a property management company can make unoccupied units more attractive to tenants, entice occupants to renew their leases, shorten vacancy cycles and keep rental payments coming in.
Rental Property Expenses Can Be Assets
Rental property expenses can help landlords qualify for tax deductions. Mastering how to minimize costs while maximizing tax deductibles will yield maximum profits.
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