Housing market conditions in some areas of the country allow for substantial rental income based on high real estate values. Without a doubt, you can purchase rental properties and achieve a good return on your investment.
However, some people see these conditions and assume they can effortlessly collect rent each month from their tenants.
In reality, this isn’t how it works. Operating a rental property means you are operating a business. This means you need to track your income, expenses, and the difference between the two—which is your cash flow (also called your “net operating income”).
While you can see absolutely produce positive cash flow from rental real estate, you need to be aware of the costs associated with maintaining your rental in good working order.
Read on to learn about the costs of owning rental property, described below.
1. Mortgage Payments
There are numerous costs associated with owning rental property, but one of the most significant is mortgage payments. As a landlord, you are responsible for paying the mortgage on the property, even if it is vacant. It can be a significant expense, especially if you have multiple properties.
It can provide a way to build equity in the property while also providing income. Another advantage is the ability to deduct certain expenses related to the property. Additionally, owning a rental property can create a sense of pride and it is a great way to build wealth over time.
2. Home Maintenance and Repairs
The cost of owning a rental property can be high, especially when maintaining and repairing the property. Home maintenance and repairs can be expensive, and if the property is not well-maintained, it can cost the owner even more money in the long run.
Examples of home maintenance and repair expenses can include fixing broken appliances, repairing siding, staining and power washing decks, patching the roof, and repairing leaks that can happen from time to time. Of course, you’ll also want to want to give your property a fresh coat of paint from time to time and you’ll occasionally want to upgrade light fixtures and appliances to keep them modern.
You’re also responsible for the trees on your property, so you may need to have professional cut them back from time to time. And, don’t forget that you’ll need to maintain the sidewalk and driveway too, if you have them.
Proper maintenance and repair of your rental property can maximize your profits and keep your tenants happy. Additionally, owning a rental property can allow you to build equity and create passive income. Over time, these benefits should outweigh the rental property costs.
3. Property Taxes
The costs of owning a rental property can be high, and one of the most significant expenses is property taxes. Property taxes are based on the property’s value and can be expensive, mainly if the property is valuable. In addition to the property tax, there may also be other taxes. Such as, a transfer tax must be paid when the property is sold.
There are also the costs of property taxes, which can be significant in some cases. However, despite these costs, owning a rental property can still be worthwhile, depending on the market conditions and the property itself.
4. Homeowner’s Insurance
There are several costs associated with owning rental property; one of the most important is homeowner’s insurance. Insurance protects your property and your tenants in the event of damage or loss, and it is essential to have it in place to avoid financial hardship in the event of an accident or disaster.
The cost of landlord insurance varies depending on the value of your property and the location. But it is typically a percentage of the property’s value and is paid monthly or yearly.
The LoPriore Insurance Agency offers a variety of insurance products for rental property owners. Rental property owners typically pay a higher premium for insurance coverage, because they are at higher risk than homeowners. The costs of owning a rental property can be high, but homeowner’s insurance can help to protect your investment and provide peace of mind.
5. Vacancy and Rental Collection
When owning rental property, one of the main costs you will incur is vacancy and rental collection. Rental property costs are associated with when a tenant moves out, and you are left with empty rental units. To rent to a new tenant, you will have to incur the cost of advertising, screening, and potential repairs.
If the property is vacant, there is no income to offset the mortgage payment. Rental collection can also be challenging, as tracking down tenants and collecting rent can be difficult.
6. Utilities
The costs of owning a rental property can vary greatly depending on the type of property, its location, and the number of units. However, utilities are one of the most common and necessary expenses for being a landlord. These costs include water, gas, electricity, trash, and sewer.
In-between tenants, you (the landlord) will be responsible for covering these expenses. This is because potential new tenants will expect the power and water to be on when they attend a showing or open house. After all, you won’t want walk potential renters through the property in the dark.
Once a lease is signed, the tenant will usually take on the responsibility of the property’s utilities during their stay. However, whether or not this is the case will depend entirely on how the lease is written and it is essential to check with local laws to ensure that you can do this.
In some cases—particularly with duplexes, triplexes, and quadplexes where it can be more challenging to subsegment utilities—the landlord may pay for the utilities and then price them into the rent. Thus, landlords should budget for these costs when considering whether or not to purchase a rental property.
7. Marketing
Finally, landlords often forget that they might want a budget to market their property. It can be highly effective to run ads on Facebook, Zillow, or Google to drive potential rental leads.
While you can market your property organically using a yard sign or Craigslist, in many cases it can pay to market your property.
This is because it can help you achieve competitive rent, as well as find a new tenant quickly when you have one that is about to move out. After all, if your property isn’t occupied, you won’t get paid.
The Cost of Owning Rental Property
Understanding the common costs of owning rental property before becoming a landlord is essential. The prices can include mortgage payments, property taxes, insurance, repairs and maintenance, and more. It’s important to consider all these factors when determining if becoming a landlord is the right decision for you.
It’s essential to weigh the costs and benefits of owning rental property before making a purchase. And remember the cost of your time! Managing a rental property can be time-consuming.
Ready to learn more? Check out our other articles on rental real estate where you’ll learn all about how to buy, flip, and invest.