Investing in rental property is a great way to develop a long-term portfolio. The problem that many investors fall into is in assuming that all they need to do is find a property and put a for rent sign in the front yard. While rental properties are still in demand, realizing cash flow is far from a guarantee. You need to constantly run the numbers and look at every expense. These expenses and numbers are the backbone of any long-term wealth potential. Not only do you need to know every one of them, you need to stay on top of any seasonal and annual changes. One oversight or omission can cause a seemingly good rental property to turn south in a hurry. Here are the five most often overlooked rental property expenses:
1. Repairs: Regardless of the condition of your property, something will happen unexpectedly. Toilets will clog, windows will break and washing machines may stop working. Even though many of these expenses will be minor in nature, you still need to account for them. This should mean allocating at least 10% of monthly rents received into a repair expense fund. Not having money to fix minor problems or pushing the work back until you are ready leads to future issues with your tenants and the property. Instead of dealing with a friendly tenant, your rent checks may start to come later and later. A tenant that took care of the property like it was their own may start to let things slide. Not having capital for big ticket items like roofs and furnaces will force you to look for expensive credit options that will eat into any cash flow. Your rental property is not immune to repairs and upgrades. Always have reserves to take care of these repairs when they inevitably happen.
2. Vacancy: In a perfect world, your property will seamlessly go from tenant to tenant, without any problems. As ideal as this sounds, it is much more difficult to execute. From time to time, there will be gaps in your leases that will require you to cover the monthly payment. This could be as little as five days or as long as a few months. Either way, you need this emergency money to keep your property afloat. Even if you have a signed lease, there is nothing saying your tenant won’t bolt out of the blue. Your security deposit serves as some level of protection, but what if they caused damage to the property on their way out the door? Now you not only have to find a tenant, but you also have to repair any property damage. Finding a tenant can take several weeks if not longer. The point is that even if this happens once in ten years it could do enough damage to wipe you out if you don’t have reserves in place.
3. Seasonal costs: Many rental property investors think the monthly payment consists of just the mortgage, insurance and taxes. Obviously, this makes up a large majority but there are other expenses. One of those expenses deals with the seasonal costs to maintain the property. Regardless of where your property is located there will be expenses in each region. If you live anywhere that is impacted by winter you need to factor in costs for snow removal. This could cost as much as $50 a storm. In the Midwest or Northeast, it is not uncommon to see anywhere between eight and twelve storms a year. In the spring and summer, you need to take care of the grass and the yard in general. These costs could run just as high as snow removal costs depending on the size and condition of the yard. Over the course of a year, these could equal close to a thousand dollars, if not more in some cases.
4. Property management: Managing one single family rental property can seem like a full time job at times. Between dealing with tenants, handling issues with the property and driving back and forth you can become very frustrated. The best way to deal with this is to enlist the services of a property manager. They handle all of these tasks and many more. For this they are typically paid anywhere from 8-10% of the monthly rents received. This is just to manage the property and not to cover the cost of the work you need done. 10% of the rent could be most or all of your monthly cash flow. When looking at the bottom line this number has to be accounted for.
5. Insurance, applications, fees and expenses: Depending on where your property is located they may have strict rental rules. Some towns require an annual application to rent to college students. Certain areas will charge for garbage removal. It is important that you know and understand any fees and expenses specific to your area or your property. What you estimate may be over as much as several hundred dollars. Additionally these can change from year to year. Individually these won’t the bank but they will take funds you could have allocated to other areas.
Running a rental property is very much like running a business. You need to stay on top of income and expenses at all times. Knowing all of these expenses can change your opinion on whether or not a property is for you.