Owning rental properties is a great way to make extra income or even go full time as a landlord. There will always be renters and real estate is almost always a wise investment. However, you do need to keep in mind that there are going to be expenses. You may have dollar signs bouncing in your eyes, but once these expenses are taken out of your revenue, it may be a rude awakening.
Knowing what expenses to expect is good to prevent surprises and also so you can find ways to save money on some of them. In this article, I will go over several expenses that you’ll need to be aware of.
1 – Property maintenance
After the mortgage, your biggest expense is likely to be the management of the property. Either because you are paying a company to handle it for you so you can earn a passive income, or you are paying for each aspect of the maintenance of the property. Some of these expenses may include commercial snow removal, landscaping, and structural issues like a new roof or building foundation. A good rule of thumb is to set aside at least 1% of the revenue from your property to maintenance. Closer to 2% is probably best though if your property is old.
2 – Upgrading appliances
As a landlord, you are mainly responsible for the upkeep of the appliances. Unless it is specified in the lease, you will need to do repairs or even replace older appliances. This could be a regular expense and needs to be viewed with some reason. For instance, if the dryer is always on the fritz, then does it make sense to continue paying a repairman to service it or does it make more sense to replace it? It all depends on your cash flow situation. If your short term cash flow is a problem then you may want to repair. Where you should definitely be thinking of replacing, is with regards to the heater. An old water heater is going to be less efficient than a new one. If you are already spending money on repairs, then it makes far more sense to replace an old water heater with a new, efficient one with a long warranty.
3 – An empty rental
There may be forces out of your control that can leave your property unrented for periods of time despite your best efforts. When that happens, the expenses don’t stop. To reduce the time the property sits empty, you can take matters into your own hands and do some marketing to generate some interest. This will also factor as an expense as you may be paying for ads on social media or even just the cost of your time to promote the property.
4 – Cost of acquiring tenants
An often hidden expense is how much it costs to get the right tenants. From advertising to doing background checks, if you want a good tenant then it pays to pay. Spending some money upfront will help hedge your bets that your tenant will be respectful of the property and reduce your long term costs.