Whilst owning a rental is a great way to build equity and generate ongoing passive income, it can also be a lot more hassle and trouble than people first realize. This is why property management software like Landlord Studio is growing in popularity. It allows you to easily track income and expenses, saving you time, and allowing you to scale your business.
In this article, we are going to explore some of the hidden costs that can sneak up on landlords.
6 Hidden Costs of Owning Rental Property
There are several taxes that are associated with a rental property. For example, capital gains tax. However, we are more specifically talking about the income taxes that are applied to rental property income.
On top of this, you need to make sure you have the right landlord insurance for the property to protect you from damages, liability claims and lost rent.
It’s also well worth ensuring your tenants have renters insurance. 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.
3. Legal Advice & Miscellaneous Fees
There are various legal fees associated with running a rental property. From getting your lease document created a to forming an LLC. plus you will likely want to consult with a qualified attorney at times.
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 potential tenants, running their credit history and checking references.
One of the major expenses that cause issues for landlords is surprise maintenance expenses.
This is why it’s immensely important to stay on top of maintenance requests to stop minor issues developing into large and overly costly problems.
It’s worth setting aside a sum of money to make sure you have the funds to deal with maintenance issues promptly.
Frequent expensive maintenance issues to be aware of:
- Leaking roof;
- hot water;
- and electrical installation.
To mitigate these issues from the start, it is wise to assess your rental properties regularly and fix potential issues as quickly as possible before they develop into major renovations needs.
5. Rogue Tenants
In an ideal world, tenants and landlords would get on like a house on fire (perhaps not the most appropriate metaphor…). However, not every tenant is good, just like not every landlord is good.
Whether you like it or not, you will likely come across a bad tenant or two in your time as a landlord. Bad tenants can damage your property, go into arrears with their rent payments, or even sue you. In the worst cases, you might have to go through an eviction which could mean months in lost rent as well as damages to your property.
This is why it’s vital to have a strict and efficient tenant screening process.
Tips to Mitigate the Hidden Costs of Owning Rental Property
When estimating your income and expenses make sure you do extensive research into similar properties in the neighbourhood as well as establishing how much things cost.
- Average rent prices for like properties in the neighbourhood. (Check our Rentometer to get yourself started)
- Average occupancy rates.
- House price valuations over the last 20 years.
- Potential maintenance costs.
2. Know your state laws and regulations
Make sure you are familiar with your local state laws and regulations and stay on top of any regulatory changes that occur. The last thing you want is to be caught on the wrong side of the law. Ignorance isn’t a defence.
3. Property Inspection.
To help avoid any unexpected maintenance expenses, get your potential investment property inspected by a professional before your purchase. Once you own it make sure you thoroughly inspect the property routinely.
4. Proper Tenant Screening
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. Get Good Insurance
Make sure you are covered and make sure your renters are covered too! With owning rental real estate, you will need to buy the right kind of insurance to cover your liability.
Owning a property of any sort can come with hidden costs. However, this is especially true with a rental property. Experience and diligence will help you avoid many of the major costs, however, no one can avoid them all and for the uninitiated, it can be all too easy to let their property slip into the red.
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Thanks for reading and we hope you found this blog interesting! However, do note that the purposes of this article is for general information. We are not licensed financial or legal professionals and as such nothing in this article should be understood to be financial or legal advice. If you are in need of financial or legal assistance please seek the help of a competent professional.