During the past few years, a trend has been developing. People are choosing to rent property rather than purchasing a place, which has been a boom for the rental industry.
Owning a rental property can be a wise investment. When everything goes well, it is a source of constant income, which can be used for small business financing or it can be your main monthly earnings.
However, renting a property is not without risks, and there are hidden costs that can have a strong impact on your wallet, as well as be a source of constant stress.
Here are the 10 hidden costs of owning a rental property you should be aware of if you are a landlord or you are planning to become one.
1. Taxes and Fees
As the owner of the rental property, you will be the one responsible for paying any taxes. These taxes tend to be much higher than those for people who live in the homes they own.
You will not be eligible for the homestead exemption, and this tax increase might be something you had not considered. To avoid situations like this, you need to know your real cash flow. This is where a rental property calculator might come in handy.
Despite this, you might be eligible for certain tax breaks since you are renting the space. It is important to get advice from an accountant to make sure no tax traps will catch you unguarded.
This is another big expense that comes with being a landlord. The insurance coverage you will have to apply for is specific to rental property owners.
However, the cost of this type of insurance premium can be as high as 25% more for landlords. This is something to consider when setting the price of rent.
This might seem like a small cost but there is more to it than you might initially expect. When tenants come to see the place, they will want to see an extremely clean property.
This level of cleanliness might be difficult to achieve on your own. This is especially true if the prior tenants were not the most detail-oriented ones.
What this means is that it is very likely that you will have to hire someone to help you do a deep cleaning of the place. Furthermore, you will have to make sure any scratches are fixed and that the bathroom tiles are spotless.
While this might seem like a small expense, this can add up if you have more than one property or if your rental property has a high turnover. Therefore, make a space in your budget for these cleaning fees.
4. Constant Maintenance
Once you have rented your property, it does not mean you stop being responsible for it. On the contrary, you will be the one the tenants will call if the sink breaks down or a light switch stops working.
Some things you might be able to take care of yourself. However, there will certainly be others that will need you to hire outside help. You must see the money you spend on this as an investment.
After all, the maintenance of the place will guarantee the integrity of your property. Furthermore, if you have good tenants, you will want them to feel as comfortable as possible so that they continue to be a constant source of income.
That said, payments to electricians, plumbers, and more are something that you should include in your budget as well. It is the best way to be prepared for the inevitable maintenance spending you will have to make.
5. Replacing vs. Repairing
You will find yourself in this conundrum more than once during your time as a property owner. It will be up to you if you will repair certain items or if you will simply replace them for a newer one.
What you should consider is the useful life of the item and the value of it. If a fridge is part of the goods you offer as a landlord and it breaks down, is it worth the repair? That will depend on how old the fridge is and what the damaged piece is.
If you are going to be spending money constantly on minor repairs for the fridge, it might be best to do a one-time investment.
Remember to evaluate which items are a long-term investment that is worth the extra money and which ones, such as decorative pieces, can do with some repair instead.
6. Legal Expenses
You might have not thought that you would need an attorney, but you are probably wrong. This is an often ignored hidden cost of owning a rental property. It is important to have legal advice when it comes to setting the terms of the rental contract.
As you might know, good lawyers can be very expensive, but they can save you thousands in future legal issues.
7. Pre-Renting Fees
You will probably want to be thorough when it comes to choosing who will rent your property. Therefore, running background checks and searching for the credit history of the applicants are some of the things you can do.
However, this can cost you some extra fees that you should include in what you are planning to spend. In something as important as renting, it is better to be safe than sorry.
No one likes to talk about it, but it is a very real possibility that despite your best efforts, you will have bad tenants. This can cause numerous unexpected expenses for you.
8. Pre-Renting Fees
From damages to the property to even more serious issues such as a lawsuit, these can be very dangerous waters. However, you will be well-equipped with the legal advice you invested in before. Hopefully, you have a bulletproof contract.
This is why it is so important to keep tenants happy. Try to be as helpful as possible to guarantee that no issues will come up.
You might have a great property, in a perfect location, offered at a reasonable price. Despite this, the universe might conspire against you and you find yourself without a tenant for a month or two. This should be a situation for which you are prepared.
Even if renting is your main source of income, you should have a contingency plan to overcome this dry period without tenants. You can allocate a fund that will be destined just for this, where you save money that can be of use in this event.
It is not something that you will want to happen, but sometimes, it is just inevitable. Another fee that might come as a result of this is the listing of your property on different outlets. While there are many free options, you might consider a paid one if you are not having success.
10. Choosing the Wrong Advisors
Looking for a cheap option might lead you to be wrongly advised. If you are working with an accountant, a lawyer, or even a rental manager, you should trust them and understand their value to you.
Getting the right advice can save you thousands of dollars in the future. Therefore, it is better if you slowly develop a network that will help you grow your rental business.
This could be instrumental to your success, but if you choose the wrong people, it could be the reason for your downfall.