Being a landlord can be a lucrative proposition, but unforeseen expenditures can put a damper on profits if they aren’t calculated into the rent beforehand. The reality is that the costs of a rental property extend far beyond the initial purchase price and fees, so having a firm grasp on expenses will ensure that you maintain a healthy cash flow. The marker by which you measure the success of your rental business will largely be based on cash flow, which is the income left after all expenses have been paid. So, what are the expenses you should factor in when determining how much to charge for rent?
Maintenance. Even if you go to great lengths to rehab a property, it will still require maintenance in the future. It can be hard to foresee what repairs will be needed, but landlords should consider expenses like carpet cleaning, paint, electrical, plumbing and any other fixes that keep a property habitable for renters. The age, size and type of property will impact your costs, but as a general rule of thumb Fannie Mae recommends that a property owner should allocate two percent of the total property value annually to cover maintenance expenses. Landlords often underestimate the cost to upkeep a rental property, and major capital expenses can stifle your cash flow, so have a contingency plan.
Property Taxes. The amount of taxes paid on a property will vary by location, and there can can also be some variance depending on whether the rental property is also being used as your primary residence. Sometimes you will find that property taxes are included in your mortgage payment, but you should still breakout this cost when determining expenses. Taxes are variable, and in many cases they will increase annually. A call into the county assessor will help you determine how much you should expect to pay in the coming year.
Insurance. The cost for an insurance policy can fluctuate a lot depending on the location of the property. Rates can be further exacerbated if the rental is located in an area prone to natural disasters like earthquakes, flooding or fire, which can require additional levels of insurance. As a landlord, you should also consider liability insurance to protect your investment in the event a tenant pursues legal action. In the end, perform the proper due diligence before putting in an offer on a rental property, and contact an insurance agent to determine the specific costs and needs.
Utilities. The property type and market will dictate exactly what utilities you should plan to cover as a landlord. In the case of single family homes, the tenant is usually responsible for all of the utilities. With multifamily properties gas and electric are typically paid for by the tenant while water and/or sewer will be covered by the landlord. Research what the competition is including in rents and what is being passed onto the tenant. To determine the potential costs, contact the utility companies and determine typical monthly usage and cost.
Homeowners Association Fees (HOA). If you are purchasing a single unit in a condominium or a single-family home, you may be responsible for HOA fees. These costs can range from several hundreds of dollars a month to nearly a thousand. Depending on the amount of the HOA fees it could be a nonstarter, so make sure to understand what they are at present as well as whether they are expected to escalate or if there are any special assessments coming in the future.
Vacancies. In the aftermath of the Great Recession, the rental market has recovered and there has been sustained demand. That said, you should still anticipate periods when the property will be vacant. To determine how much money you should set aside, research your local market to understand how long rental properties stay untenanted. As part of the is process, you should also set aside funds to advertise rental properties. While there are free tools like Craigslist that can be effective for marketing a property, other avenues like newspapers, real estate websites or property management companies will come at a cost.
Property Management. Hiring a property manager can free you from the tedium of being a landlord. If you own multiple rental properties, this role might be even more pertinent to your venture. To employ this service, it can cost between 8 to 10 percent of the gross rent, but in return the property manager will handle tenant notices, inspections and evictions. In some instances, you may elect to only utilize a property manager for tenant placement. In that case, the model is often a flat fee that can cost as much as a full month of rent. Even if you choose to manage the property yourself, you should still account for the costs (e.g. gas, time, etc.) associated with it.
As a landlord, you can expect to encounter your share of surprises, but there is no need for expenses to be one of them. By mitigating the unknowns, you can be on your way to a profitable rental property.