Purchasing a property with the goal of renting it out for an additional source of income has been a popular investment option and one that many people use on their way to building a future and gaining or retaining financial stability and growth.
With such confidence in renting and the ability to make money often times, landlords see this as an easy way to make money without putting in much effort. But the truth is this is not a truly passive income stream and does require intervention and effort on the landlords part to maintain a certain level of upkeep in terms of your property’s condition, your relationship with your tenants, and a specific city’s real estate laws and regulations.
Moreover, owning rental property comes with some other costs that people don’t often mention to prospective property owners and can often come as a shock so we’ve decided to help by covering the most common expenses landlords have that will eat into their rental income.
1. Fees, Tax, and Insurance
Owning rental property means certain costs are unavoidable since it is governed by a number of legal requirements. As a landlord, you will be facing the cost of property taxes, the cost of insurance on the property, and the cost of any associated fees associated with your rental property. Which you as the owner cannot get out of paying these bills, even if you face vacant properties.
2. Legal Advice & Miscellaneous Fees
You will need a good attorney and good legal advice for owning rental property and while the cost may seem like an issue at first skimping on legal fees can become even more costly in the long run, especially in the case of conflict resolution between you and your tenant. 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
In order to collect 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 specific standard and keep track of all changes, upgrades and costs so you’re aware of how this eats into your rental income and you don’t go over budget.
Depending on the state and age of the home, 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
Unfortunately, is you can and you will encounter bad experiences with tenants renting your real estate property, whether you like it or not. As a landlord, you need to learn how to mitigate your encounter with bad tenants and be selective in who you choose to rent your property out to.
It goes without saying that bad tenants can play a role in increasing your unexpected expenses and even result in a costly lawsuit.
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 and build relationships with people that can have a positive effect on your investment.
A solid network for any landlord would consist of the following:
- A good real estate agent
- Property management team
- A maintenance company
- A good attorney
- A good accountant
When you have a network you can rely on you can often call in favours or reduce costs or rates with negotiation due to long-lasting relationship.
Having a property doesn’t mean you will always have a tenant and not every tenant is the ideal person to rent to so you have to consider the opportunity cost and loss involved in vacancy. If tenants fail to pay, or pay on time, if the residence needs to be unoccupied for a time is to be repaired, if finding a new tenant you trust takes longer than expected you could be dealing with a vacancy issue.
This means that you end up paying your monthly bond repayment as well as any other costs out of your own pocket.
Which is why it is important to have a backup plan when this case arises to offset the negative repercussions of having no tenants. ensure that you have an emergency fund that can cover your costs for at least three months which will give you some breathing space and not put too much pressure on putting someone into your rental place as soon as possible.
These decisions can often have you renting to people who could end up being more costly than the rent they provide.
Keeping track of your costs
We hope that you can now see that renting out your home is not the free ride to passive income that many make it out to be, its more like running a little business where you have to manage your capital injection, keep track of costs and provide a good service to your customer.
Ultimately, keeping the customer happy is what will ensure you will always have a home that is in demand and that you can charge a reasonable amount that covers your expenses and services your bond or adds to your income once you’ve squared your initial debt.