Real estate has always been a hot spot for investors, and is well-known to produce some of the wealthiest people in the world. However, it is always better to understand each and every aspect of your rental property investment before putting your money in.
Do you know the costs of owning different properties? Owning a property to live in is different than owning a one to rent. If you didn’t know that, I bet you wouldn’t know about the hidden costs of owning a rental property!
For every property, the investor generally has to take out a loan or a mortgage to own it. As investment property loans are riskier, the interest rate for an investment real estate is generally higher than a traditional mortgage interest rate. It is usually higher than primary residences’ rates by at least 0.50% to 0.80%.
Although tax rules can change from year to year, there is the cost of property taxes when owning a rental property. These taxes tend to be higher when the individual who owns a home does not reside in the property. (i.e- landlords). This tax increase might not be considered until it’s time to file with the state and federal governments, but it can not be overlooked.
For rental properties, two types of insurance are generally bought: homeowner insurance and landlord insurance. The landlord insurance covers property damage, lost rental income, and offers protection for liability. This is an extra protection in case a tenant or a visitor gets hurt at your rented land. Landlord insurance is usually 25% more than the homeowner insurance.
If you are looking to lower your costs, you can consider asking if there is a way to combine your landlord insurance with your homeowner insurance policy.
Having a tenant in your property doesn’t mean the maintenance stops! As the landlord, you will be the sole individual responsible for the 24/7 repairs. Most seasoned landlords set aside additional funds to cover the constant maintenance needs and often have a qualified contractor on hand that they can trust with the work.
You can consider putting aside 20% or 30% of your rental income to have a timely fix on your property.
It would be a great save if you are handy, and can fix up the damages by yourself.
The best case scenario is that your rental property is extremely popular and it is never vacant. However, not every wish comes true. It might be because your tenant left and you have yet to find a new one, or it might be that the market is not doing well. Whatever the reason, it is always better to allocate a certain amount of money if that happens.
A happy tenant is a constant tenant, but that doesn’t mean they won’t have to move at some point. When you find yourself with a vacant unit, there are fees associated with getting a qualified tenant into the property. A multidimensional advertisement plan is needed to find an applicant that meets the needs of your property. Online marketing, word of mouth and more traditional avenues such as newspapers and flyers are all ways to market your property. Unfortunately, these advertising options cost money and take up a ton of time.
Sourcing for a (hopefully right) tenant is hard and time-consuming, not to mention costly. You might have to hire a hiring agent or a property manager to help source tenants, if you are investing in real estate part-time. It is better to be selective when choosing tenants, as a bad tenant might damage your place and cost you to spend more.
To search for a good tenant, it is advised to do a background check on them and their credits. As we say, vacancy is less costly than renting to a bad tenant.
No landlord wants to deal with a nightmare tenant, let alone the financial strain that comes from breaking the terms of a lease agreement. However, it is bound to happen at some point. While it is essential to know the laws that govern the eviction of a tenant — there are also fees associated with the process. Filing for an eviction detainer or dispossessory can cost up to $250 and is a lengthy legal process.
Property Management Fees
If you’re not the kind of person who wants to deal with the prospects of a vacant rental property or the accounting/financial obligations, it may be worth your time to contact a property management service. A full management service will market the property, find tenants, provide 24/7 maintenance, help with accounting/tax services and deal with any court appearances in the event of an eviction.
Rental property may have more hidden costs, but if managed well, it can produce a high rental income. To understand fully the hidden costs of investing in rental property allows you to make wiser decisions, hence gaining higher income.