Looking for an investment option to make money every month? You’ve come to the right place! Real estate investing through owning rental property is one of the best ways there is to earn steady cash flow each and every month. The benefits of owning rental property are many. First of all, renting out real estate properties provides you with regular rental income. That is, you earn monthly cash flow from renting your investment property out to tenants. Second, owning rental property is first and foremost owning real estate, which as we all know appreciates in value over time. Thus, you also benefit from real estate appreciation in the long term, especially if your rental real estate is situated in a strategic location.
However, investing in rental properties is not all roses. You cannot expect to buy a rental property, start renting it out, sit back, and relax, with money flowing into your pocket or bank account. Owning rental property and being a landlord is associated with many hidden costs, and if you want to be a successful real estate investor, you should learn about them before you buy an investment property. But as we’ve already said, you’ve come to the right place, so keep reading to learn all you need to know about the hidden costs of owning rental property and how to mitigate them.
Related: Becoming a Landlord: The Best and The Worst
Hidden Costs of Owning Rental Property
Hidden Costs of Owning Rental Property #1: Property Tax, Property Insurance, and Fees
As we said, owning rental property is indeed owning real estate, so you will face many of the costs associated with buying real estate, regardless of whether your rental property is occupied by tenants or you face vacancy. You will have to pay property tax, property insurance, and association fees for any real estate groups and associations you belong to. Property tax varies from one location to another, so make sure to study your local legislation before buying investment property. Moreover, according to the Insurance Information Institute (III), the landlord’s insurance premium is about 25% higher than the homeowner’s insurance premium, which means that it costs more money to insure a rental property than a home. Before buying investment property, conduct investment property analysis to assure that your rental income will be enough to cover all expenses related to tax, insurance, and fees and still leave you with strong positive cash flow each and every month.
Hidden Costs of Owning Rental Property #2: Legal Advice and Administrative Costs
Buying investment property and owning rental property requires having a good real estate attorney to have access to good legal advice. Hiring a good attorney costs money, so you have to budget this hidden cost to assure positive cash flow. Moreover, you have to factor in such administrative costs of being a landlord as interviewing potential tenants (every time you have a vacancy), running credit history for potential tenants, and checking their references. Finding a good tenant costs time and money, but it’s worth the investment at the end.
Hidden Costs of Owning Rental Property #3: Bad Tenants
This leads us to the next hidden cost of owning rental property: having bad tenants. Unfortunately, not all tenants are good, so you have to always make sure to take the time and effort to choose good tenants as a landlord. Bad tenants are a leading reason for higher than expected rental expenses. Nevertheless, if you end up with bad tenants despite all your efforts to do otherwise, you have to learn to treat them as required and to fulfill all their reasonable and legal demands to avoid a lawsuit against you as a landlord. So, always be selective about whom you allow to rent your income property (without risking discrimination) and then do everything possible and reasonable to keep your tenants happy. In this way, you will avoid major damages caused by them in addition to high vacancy rates.
Hidden Costs of Owning Rental Property #4: Property Management and Maintenance
Owning rental property is not only about buying investment property, finding good tenants, and collecting monthly rent. On the contrary, landlords have to keep their income property in a good shape at all times. Fixing and maintaining the property’s condition includes dealing with such issues as a leaking roof, plumbing, the heating system, the electrical installation, etc. You have to set up your rental property in the best possible shape as soon as you buy it and keep it that way to attract good tenants.
Hidden Costs of Owning Rental Property #5: High Vacancy Rates
A major hidden risk associated with owning rental property which future real estate investors sometimes ignore is high vacancy rates. The risk of vacancy is a major issue because it means that you receive zero rental income while still running most of your rental expenses. The result is the nightmare of every landlord and real estate investor: negative cash flow! This means you are actually losing money from your income property rather than making money. Always make sure to have a backup plan in case of a few months of a vacant property.
Hidden Costs of Owning Rental Property #6: Not Working with the Right Real Estate Professionals
To succeed in owning rental property, you need a strong real estate investment network. You simply cannot succeed as a real estate investor on your own. Not working with the right real estate experts will cost you money and lead to many headaches, so make sure to start building your real estate investment network even before you buy your first rental property.
Related: The 6 Hidden Costs of Owning Rental Property
How to Mitigate the Hidden Costs of Owning Rental Property
Tip #1: Conduct Real Estate Market Analysis and Investment Property Analysis
No matter how of an experienced real estate investor you are, always make sure to perform real estate market analysis and investment property analysis before buying investment property to make sure you will have positive cash flow. Consider your expected rental income as well as all possible costs and expenses associated with owning rental property to arrive at an accurate estimate.
Tip #2: Use a Rental Property Calculator
To save time and energy with the previous one and to arrive at the most accurate results, use a rental property calculator, also known as an investment property calculator. Looking for the best one? You’ve come to the right place: Mashvisor’s investment property calculator is the answer to all your needs as a real estate investor and a landlord.
Sign up for Mashvisor for access to the best investment property calculator in the current housing market.
Tip #3: Underestimate Rental Income and Overestimate Rental Expenses
After conducting the above-mentioned analyses, make sure to use conservative estimates for your rental income and liberal estimates for your expenses.
Tip #4: Learn About and Adhere to Local Laws and Regulations
Always follow up with federal and state laws and regulations related to real estate and landlord-tenant relations. Learn your responsibilities and liabilities as well as your rights.
Tip #5: Conduct Home Inspection
Before buying investment property, make sure to run a home inspection to know the exact state of your income property and avoid any unexpected costs related to managing and owning rental property.
Tip #6: Choose Your Tenants Carefully
Check references, run credit checks, conduct interviews, etc. – invest all the time and other resources needed to choose good tenants. Filling your income property with bad tenants to just avoid vacancy is one of the worst and costliest mistakes you can make as a landlord.
Tip #7: Have an Emergency Fund
No matter how well you have prepared your budget, put some amount of your monthly rental income aside to build an emergency fund to cover for any unexpected and hidden costs of owning rental property.
Related: 5 Risks That Come With a Rental Property and How to Mitigate Them
Tip #8: Join a Landlord’s Association
Although you will have to pay association fees, joining a landlord’s association in your location will provide you with some very much needed support and help when owning rental property
Tip #9: Build a Real Estate Investment Network
Get to know and work with the best real estate agent, real estate attorney, property management company, accountant, and other real estate investors.
Tip #10: Sign up for Mashvisor
Read our real estate blogs to learn all you need to know about investing in real estate in general and owning rental property in particular. Make use of our property finder to buy the best investment properties with the least hidden costs. And last but not least, use Mashvisor’s investment property calculator to estimate all one-time and recurrent costs of buying and owning rental property.