Property owners—whether they rent out a simple single-family home or a complicated multi-unit complex—know that being a landlord comes with real financial benefits. However, the job can also come along with some unexpected costs that without proper management and forecasting can catch a landlord off guard. Because properties are not passive investments, it takes solid planning and forecasting to get the most out of your money—and time.
Often owners find that outsourcing property management to a dependable third party helps them stay on track and on budget, not to mention reduces the everyday burdens of upkeep and tenant communication. You may have already experienced some of these pitfalls, but others may be new to you. Either way, here are some hidden obstacles to watch for as you plan for the highs and lows of owning and renting a property.
- Turnover costs. Often landlords, especially those new to the business, tend to underestimate the costs involved with turning over a property when one tenant vacates and the other prepares to move in. Even if you feel like you had responsible previous tenant, you may surprised by the condition in which you find it. There are costs associated with cleaning, painting and maintaining properties, plus the operating costs of vacancy downtime. A good recommendation is to budget roughly one month’s rent to safely cover turnover costs.
- Insurance & licensing fees. Property insurance rates can vary widely depending on the type of structure you’ve invested in and where it’s located. These fees can also change over time, so it’s smart to learn about insurance ins and outs before you invest in a home or multi-unit property. Additionally, most municipalities will charge property owners intending to rent a unit a business-licensing fee because a rented home is considered a small business. That’s another hidden fee to be aware of.
- Unpaid rent. While you can do your best to ensure that you choose only conscientious, dependable renters, there’s still a risk that comes with any rent payment. You can’t guarantee it will actually be paid. Inevitably this issue comes up sometime over the “life” of a rental property. Remember, you still have to pay the mortgage even if tenants miss rent, so plan ahead for that day when the check doesn’t arrive in the mail on time or neglects to pay at all.
- Tricky taxes. Depending on the municipality in which your home or apartment building is located, property taxes could be higher if the property is not used as a primary residence. This varies by state and county, so make sure you’ve done your research on tax laws prior to purchase if you’re planning to rent your investment property.
- Maintenance time. Time is money, and if you’re short on time, it could be the ideal time to hire a property manager to take care of ongoing maintenance on your property. A quality property manager (or the PM’s contracted vendor) could easily take over tasks such as managing sprinkler systems or heating and cooling systems, which you once had to build into your busy day.
- Legal fees. Despite taking time to source quality tenants, pay your taxes properly and abide by the rules of property ownership, there’s no way to predict if or when you may run into a legal issue. In an unfortunate situation such as an eviction, if you don’t have a property manager in place, you will need to hire an attorney—and that costs money. Hefty legal fees can quickly sabotage the money you’ve made off of your investment.
- Safety code costs. It’s in a landlord’s best interest to reduce risk, and it’s a property manager’s job to protect the owner from potential claims of liability. Unfortunately, many homeowners ignore safety issues or overlook items that may not be up to code. However a malfunctioning smoke or carbon monoxide detector could cost you way more than money—it could claim a life. The same goes for failing stairway railings, tripping hazards and outdoor issues like leaning trees: As any good property manager will warn you, pay to get them fixed or upgraded now—before they come back to bite you.
- Property management percentage. Although not unexpected, a property management fee is a fixed cost based on a percentage of income paid to a property manager to become the point of contact for tenants, leasing, maintenance coordination and overall management of a home or apartment building. A quality property manager will always disclose fees upfront so owners are not surprised down the road.
Wondering if you’ve got all your ducks in a row? It might be time to consider how a property manager could help you uncover more hidden costs and protect you from ever having to pay them.