Remember These Costs When Budgeting for a Rental Property Investment
By Space Coast Daily // April 6, 2020
If you’re looking for a long term real estate investment, purchasing a rental property can be a great option. By choosing the right property, you can receive a steady monthly income with little cost or work involved.
The main goal of a rental property investment is to have your monthly expenses take up the smallest percentage possible of the monthly income from the property.
That seems simple enough, however there are many expenses that are often not taken into account when deciding to invest in a rental property.
Most basic rental properties that do not require high maintenance have expenses around 30-40% of the property income. Some properties can have up to 80%.
If your budget estimate puts your expenses lower than 30%, you’re probably missing some.
These are the most commonly forgotten expenses involved in owning a rental property:
1. Property Management
Unless you intend on managing your own property, which can take as many hours as a part-time job, you will need to hire a property manager, such as Utopia Property Management.
This business will handle all of the day-to-day tasks involved with managing a rental property, including rent collection, tenant screening, and regular maintenance.
A good property manager will keep you thoroughly informed of the status of your properties and will have access to affordable and high-quality property resources, such as lawn and plumbing companies. They typically charge 8-12% of the property income.
2. Payment Processing
If you opt-out of hiring a property manager, you will need a system for rent collection. As we live in a modern world, accepting virtual payment forms is extremely important. This means setting up an online merchant account to utilize a credit card payment processing system.
Companies like Double Helix can provide both online and physical credit card processing options with chargeback risk protection and low monthly fees.
A payment processing company will usually charge less than a few percent of each transaction, plus standard monthly payments.
3. Taxes and Licensing
Sales tax varies depending on location, so it is important to be aware of the taxes involved in a rental property in your area. Depending on where you live, you may also be required to obtain licensing in order to rent out a property. Check your local laws for business or landlord license requirements and the fees associated with those licenses.
As an active landlord, it is important to stay up to date on real estate laws; stay informed using an unbiased, trustworthy news source like Newtrals.
4. Lack of Tenants
Your rental property will not be rented out all 365 days of the year. It is extremely important to consider the expense of an empty month, as you may have a few some years. Ensure that you can afford to pay your property expenses if there are no tenants.
Unfortunately, you may also have to evict your tenants. Be aware the costs involved in the eviction process should this arise, which can range from $300-800 typically. Pro-tip, always make sure you have a quality 30 days notice to vacate form on hand that way if a problem ever arises you know that you at least have that on file.
There are different types of insurance you can receive for a rental property that give you different types of coverage. Homeowner’s insurance will protect the property itself, but not the contents within. This is mostly useful for natural disasters like tornadoes or earthquakes, so consider your property’s level of risk for such events.
When having regular tenants it is important to consider the potential damage that could occur within the home and how much that would cost you.
6. Maintenance and Upkeep
Over time, your property will deteriorate and require maintenance. This can cost thousands of dollars a year and is not always expected.
This covers everything from water damage to worn paint to broken AC units and appliances. Budgeting for regular maintenance is extremely important as these costs can add up quickly if not properly accounted for.
Additionally, upkeep services such as pest control and landscaping are vital to protect the longevity of a property. You can determine whether you or the tenants pay for these services, so either includes them in the lease or adjust the rent accordingly.
You can use a catch-all budget of 10% over your mortgage, or you can estimate each cost knowing which repairs are likely upcoming for each property. Either way, over-estimate.
Once you have your rental property prepared for tenants, the property will not rent itself. Consider the costs involved in marketing, especially if your property management company does not include this service.
This could be as simple as doing some online marketing yourself or paying for a separate marketing company to bring in renters. Listing on Zillow, Craigslist are free unless you pay for an upgrade.
Photography can be DIY or hire a professional for around $200. Signs cost about $20 apiece and need to be replaced over time. If you hire a property manager, they will handle the marketing and give more exposure than a DIY marketing campaign.
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