Owning rental property is a popular investment option to earn you steady cash flow every month.
With that being said, a landlord’s job is not as easy as you may think and you cannot expect money flowing in without maintaining a certain level of upkeep in terms of your property’s condition, your relationship with your tenants, and your city’s real estate laws and regulations. Moreover, owning rental property comes with some hidden – but important – costs that every real estate investor should be familiar with. But before we go through the hidden costs, let’s talk about some advantages gained from renting out real estate. The first one is pretty intuitive: rental income. You earn monthly cash flow from renting your property to tenants. Moreover, your property’s value appreciates over time if your rental real estate is situated in a strategic location. But that being said, you cannot expect money to come flowing in if you just sit back, relax, and passively hope that everything turns out A-OK. As time passes, hidden costs of owning rental property are inevitable, and you have to be proactive to tackle them head on in order to maintain a positive stream of cash flow from your investment activities.
Related: 7 Steps to Buying Rental Property
6 Hidden Costs of Owning Rental Property to Watch Out for
1. Fees, Tax, and Insurance
With owning rental property, you will be facing the cost of property taxes, the cost of insurance on the property, and the cost of any association fees associated with your rental property. You cannot get out of paying these bills, even if you face vacant properties. It is worth mentioning that rental homes cost more to insure. According to the Insurance Information Institute, the landlord’s insurance premium is around 25% more than with the homeowner’s insurance. As a result, it costs more money to insure an income property with a special landlord insurance policy. Your tenant’s rental income should suffice to cover up the increased expenses, but do not get too comfortable with the idea because your tenants could potentially leave before their lease is up.
2. Legal Advice & Miscellaneous Fees
You need a good attorney and good legal advice for owning rental property. Hiring a good attorney is far from cheap, so make sure to have some budget saved up specifically for this cause. In addition to legal expenses, landlords will have to pay for administrative costs related to interviewing potential tenants, running their credit history and checking references.
3. Maintenance Issues
Owning rental property does not stop at collecting rent; landlords have to keep up with the tenant’s constant demand for fixing and maintaining the property’s condition inside and out. This entails, but is not limited to, issues with a leaking roof, hot water, heating, plumbing, and electrical installation. To mitigate these issues from the start, it is wise to invest in renovating your rental property to a good enough standard from the get go. You might have to spend more in fixing the property, but it will save you from incurring additional maintenance costs in the long term.
4. Bad Tenants
In Utopia, bad tenants do not exist and you, a happy landlord, choose to sit back and enjoy a nice cold drink. Unfortunately, the reality is not as far-fetched, and you will encounter bad experiences with tenants renting your real estate property, whether you like it or not. The trick to owning rental property is to learn how to mitigate your encounter with bad tenants and be selective in who you choose to rent your real estate properties. It goes without saying that bad tenants can play a role in increasing your unexpected expenses and even slap you with a big fat lawsuit. Not cool! So to prevent this from happening, keep your tenants happy and do your best to adhere to all their demands as best as possible. Also, be very selective at the beginning and don’t forget to do background checks, run credit histories, and check references.
Related: Becoming a Landlord: The Best and The Worst
5. Working with the Wrong People
In order for you to have success in owning rental property, you must build a strong network of people to help you grow your business in the long run. Find people you can trust and do not work with those who do not have your best interests at heart. People can make or break the business, so choose them wisely.
Build a strong network with the right people:
- A good real estate agent
- Property management team
- A maintenance company
- A good attorney
- A good accountant
Treat these people as your business partners because hiring the wrong people is the worst hidden cost of all.
With owning rental property comes the risk of vacancy. This means that you end up paying your monthly mortgage payment as well as any other costs out of your own pocket. It is important to have a backup plan when this case arises to offset the negative repercussions of having no tenants. It is recommended to have an emergency fund to be able to survive vacancies with little trouble.
Related: 5 Risks That Come With a Rental Property and How to Mitigate Them
Tips to Mitigate the Hidden Costs of Owning Rental Property
1. Underestimate Income and Overestimate Expenses. You’ll be setting yourself for long term financial success by using conservative estimates for your rental income and liberal estimates for your spending. If you are living without predictable paycheck, prepare yourself for worst case scenarios, have an emergency fund, and stash away extra cash.
2. Keep Up with State Laws and Regulations. Follow up with federal and state laws to outline your responsibilities and liabilities.
3. Proper Inspections. To avoid unexpected expenses, have the property thoroughly inspected by a professional before you decide to own a rental property.
4. References and Credit Check. Don’t rush to fill your vacant property just for the sake of avoiding vacancy; run background checks and check references. Remember, vacancy is less costly than renting to a bad tenant.
5. Find The Right Kind of Insurance. With owning rental real estate, you will need to buy the right kind of insurance to cover your liability.
6. Emergency Fund. Have an emergency fund to pay for unexpected expenses that are not covered by your insurance package.
7. Join a Landlord’s Association. Joining an a landlord’s association will offer development and support for landlords owning rental property in your area. Aside from the landlord’s association, check out Mashvisor to gain a competitive advantage in your investment strategy.