Owning a rental property can be a great source of passive income—but it also requires costs that many potential landlords don’t understand. Before you make the jump to turn your house into a rental and hire a property management company, be aware of these 10 unexpected expenses of owning a rental property:
One of the largest fees for landlords is taxes and fees. Even though you rent the property to someone else, you still own it and are responsible for paying property taxes. Property taxes must be paid even after the loan on the house is paid off. Many areas offer homestead exemptions to people who own and live in the same property, but those redemptions don’t apply to landlords who use the property as a real estate business. That means taxes on rental properties tend to be much higher than taxes on homes where you reside. If you are turning a house you previously lived in into a rental property, be sure to alert your local tax collectors about the change.
If you go to sell a rental property and haven’t lived in the home for at least two of the previous five years, you’ll likely lose access to the capital gains tax exemption, which means you’ll have to pay more taxes on the earnings from the sale of the house. These taxes don’t impact your rental operating expenses but are a consideration for down the road.
However, on the positive side, a rental property is also a business and may be eligible for some tax breaks. It’s best to talk to an accountant or property manager to get personalized tax advice for your property and area.
Again, because you own the home, you are responsible for paying homeowners insurance that is specific to rental properties. But because you don’t live in the property, you pay taxes as an investor and not as a typical homeowner. In many cases, this type of insurance can have 25% higher premium than standard homeowners insurance.
Insurance rates vary depending on the location, age, size, and material of the home. If you don’t live in the area, there may be surprises when it comes to insurance rates surrounding areas prone to flooding, hurricanes, or wildfires. Be sure to do your research and talk to a trusted insurance company to get the best coverage for your property.
Depending on the location and type of property you own, you may have to pay monthly or quarterly fees to the homeowners’ association. These fees can vary, with condos and townhouses typically having higher HOAs to cover the cost of maintaining common areas, walkways, and any gyms or pools. In some parts of the country, HOA fees may be higher to cover snow removal and weather-related services. HOA fees may also cover things like security, community upgrades, trash removal, and more.
As a landlord, you have the right to include the HOA fees in your rental cost and pass the cost to your tenants. However, some communities may require the property owner to pay the fee. In most cases, it is common for the landlord to cover HOA costs.
As a landlord, you are responsible for maintaining the property and ensuring it is in good condition. The cost of maintaining the property varies depending on the age, location, tenants, and a number of other factors. Some experts recommend reserving 10-15% of the annual property rent for maintenance.
Maintenance costs include small expenses like replacing smoke alarms or locks to larger issues like fixing plumbing issues and damage from natural disasters. There is also seasonal maintenance like cleaning our gutters in the fall, turning on sprinklers in the summer, and checking the furnace in the winter. Your fees include the cost of repair materials and also the cost of hiring someone to make repairs and potentially be on call when maintenance issues arise.
The good news for landlords is that issues caused by tenant neglect or damage are typically covered in the tenant’s security deposit. That means that if a tenant does something to damage the property, they are at least partially responsible for covering the cost of repairs.
Tenants will take care of cleaning the unit while they live there, but landlords are responsible for providing their tenants with a clean place to live. That means paying for a cleaning service to deep clean the unit between tenants, including services like carpet cleaning, duct cleaning, and outdoor landscaping upkeep. That time is also a good time to perform regular maintenance, which can also open the door to new issues.
Depending on the age of your property, you may want to make occasional updates. Updating things like flooring, paint, and appliances can prevent maintenance issues down the road and help your rental property stand out in a competitive rental market and bring in quality tenants. Updated units can also typically have higher rent prices, so investing in some updates could be a wise financial decision.
Unlike maintenance, updates don’t have to happen on a set schedule, so you can budget and save until you are ready to make the upgrades. Keeping an eye on the updates of other rental properties in your area can also help you plan ahead and stay competitive.
Utilities like gas and electricity are typically the responsibility of the tenant. However, some utilities, like water and sewer, are often included in the rent. These utilities can be more difficult to put in the tenants’ names or aren’t high enough to warrant having to change them with every tenant. It is up to you as a landlord to choose what (if any) utilities to cover. Whatever you choose, be sure to get an estimate from the utility company of an accurate estimate of the average monthly cost and include it in your operating expenses.
Some rental property owners manage everything themselves, while others hire a property management company to advertise and manage tenants and even respond to maintenance issues. Hiring a property management company is an added cost, but it can make the process of owning a rental property much smoother and lead to more revenue for the property with quality tenants and higher rental costs. A property management company takes away much of the day-to-day administration of the property. Hiring a property management company is also a wise decision if your rental property isn’t close to where you live because it provides someone close to the property to take care of any issues.
As you consider owning a rental property, look around at local property management companies to see their rates and services. Some property management companies specialize in certain areas or types of properties, so you want to find one that meets your needs.
Many rental property owners overlook the work and costs of finding quality tenants. Before anyone moves into your rental property, they need to sign a lease agreement. Hiring a lawyer who is experienced in rental properties to write the lease can ensure it is legally sound and protect you from any future issues. A lawyer can also help you know your rights as a landlord in your area. Keeping a lawyer on retainer can be helpful to quickly and smoothly solve any legal issues that may arise. Many lawyers that specialize in rental properties have set rates for certain services or charge by the hour.
Similarly, pre-renting fees such as background checks and credit checks of potential tenants can also protect you and help you find the right tenant. These services can add up, but they can also protect you from signing a bad tenant, leading to savings in the end. Some landlords charge a small application fee to offset some of the pre-renting costs.
Not all rental properties are full all the time. Even with a constant stream of tenants, there may be a week or month gap between when one tenant moves out and another moves in. If the rental market changes, you may have a longer vacancy period. During that time, you are still paying taxes and homeowners insurance, plus other fees, but without earning any rental income to offset the costs.
Vacancies can be hard to predict and prepare for, so it is helpful to have a contingency plan in place. The general rule is to plan for two months of vacancies between tenants, which you can use to impact your rental costs and your savings. Keeping an eye on the rental market and limiting the gap between tenants can limit these expenses and maximize your income.
Owning a rental property can be a great business venture, but don’t forget about the unexpected costs.
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