When purchasing their first rental properties, many investors believe that the assets will effortlessly bring in money. However, they soon discover the hard way, that owning rental units attract a myriad of costs, which can significantly dent the amount of rental income. It is, therefore, important for a rental property investor to understand what these associated costs are, and how to best avoid or keep them in check.
Unscrupulous or untrustworthy contractors As a landlord, you will have to work with contractors to grow and excel your rental investments. Some of these partners are property management companies, real estate agents, attorneys, accountants, as well as, service and repair contractors. Enlisting and retaining the services of these professionals naturally requires money, which ideally, should come from the rental property.
Hence, it is important that you get reasonably priced partners and contractors, who understand that for them to get their pay, your business needs to flourish. As such, their primary concern should not only be to get paid, but rather to help you grow your rental investments.
Problematic renters As ironic as it may sound, even though a tenant is supposed to give you income if you get a wrong one you might just realize that a large chunk of the rent goes to waste. For instance, the tenant might make you waste precious time to demand the rent each time it is due or compel you to spend countless hours mediating conflicts between him or her and other tenants. Similarly, you might incur costs evicting the tenant or fighting off legal suits filed by the renter.
A straightforward and economical way for you to avoid such costly inconveniences is to put in place a thorough tenant screening procedure to help you identify and qualify high-quality renters, who will pay the rent promptly.
Property maintenance One of the pains of a landlord is ensuring that the property is rent-ready and in the perfect habitable condition possible. While maintaining and servicing the rental units can be smooth and manageable, at times the cost can spiral out of control, more so, if the property is old and severely worn out. In such a case you might have to finance endless and costly repairs before the building becomes habitable.
If you wish to control such losses, make sure you carry out careful property inspection to evaluate the condition of the property before purchasing it. Moreover, only hire reliable, competent and affordable service or maintenance technicians, who will give the right solution. Lastly, inform your tenants through the rental agreement that they will be liable for certain types of property damages.
Insurance costs It makes perfect business sense for a property owner to protect his or her investment against any possible event. The challenge, however, sets in when the insurer considers the owner as an investor instead of the primary occupant. As a result, the owner has no option but to settle for the costly special landlord insurance coverage, whose premium averages about twenty-five percent more than the regular homeowners’ policy. Not only does this bite a huge chunk of the rental income, but it gets complicated if the resident terminates the lease before the full term, and the house goes for long without getting a new occupant.
A prudent way of managing such costs is to factor in the insurance premiums in the monthly rent and doing all you can to keep your renters happy so that they stay to the end of the lease. Furthermore, have in place effective measures that guarantee you always have prospective tenants who are ready to move in, immediately when the units become vacant.
Increased taxes Most states and municipalities have homestead exemptions where they offer tax breaks to owners who live in their properties. In contrast, however, they impose heavy tax burdens on the investment properties. Naturally, the tax burden will have an impact on the amount of rental income a landlord gets from his or her investment. Fortunately, there are other costs related to the rental properties which can entitle you to tax breaks. Talking to an experienced and credible rental property taxation expert can help you to identify such perks.
Miscellaneous Damages Another common yet difficult to predict cost are those that occur in the middle of another activity. For instance, a window could break during property maintenance or an AC unit could get damaged during servicing. Since it is practically impossible to foretell if and when you will incur such expenses, it becomes relatively difficult to keep the costs in check. Nonetheless, you can try to be extra careful when handling the repairs, and only let someone with the right experience and competence manage the repairs. If you hire a maintenance or service specialist, go for one who has adequate insurance coverage and offers service warranties.
Conclusion Most first-time rental property investors hardly think about the hidden costs associated with their investment until after they have purchased the units. Even though by then it might be too late to reverse the investment decision, it is still possible to keep those pesky costs in check. You only need to know what expenses are denting your income and take the necessary reactive measures to control them. Still, taking the time to assess and evaluate the property before purchasing it remains the best way to keep most of these hidden costs at bay.