As home prices soar and Americans choose to rent instead of own, those with real estate investment properties stand to gain a significant profit. With the rental market being so competitive, landlords often have their pick of the litter, and this increased competition has allowed for higher rental rates and a better income for the landlord in question.
However, rental businesses aren’t all profit—there are a variety of risks and costs associated with this endeavor that prospective landlords should take into account.
There are many insurance considerations to take into account, and rental houses can often cost more than personal homes to insure. Consider this: a homeowner who cannot sell his or her home may find that their owner status goes from occupant to investor, which can require a special insurance policy for landlords.
Generally, this can cost up to 25 percent more than typical homeowner’s insurance might. If this is the case, you’ll need to purchase landlord’s insurance that provides full coverage. Hint: It’s advisable to require tenants to show proof of renter’s insurance, as this will ensure they are covered and lessen the chances of court action against you for damages in case the worst happens.
Taxes, taxes, taxes
Depending on where your real estate investment is located, you may find that property taxes are much costlier than previously anticipated. Depending on where your property is, you may pay taxes ranging from .5 to 2 percent of your property’s assessed value.
As you search for properties, especially if using the Multiple Listing Service (MLS), be sure to talk to local municipalities to determine that the listed taxes are accurate. Also consider real estate income taxes; you’re likely to pay your taxes once a year, and it’s vital that you set money aside to fulfill your tax obligations come tax season.
There are many expenditures related to placing, maintaining, and evicting a tenant. From the onset, you’ll pay for listings and marketing to attract tenants. During your tenant’s stay, you’ll be required to ensure the property remains habitable. When it comes time for your tenant to leave (of their own volition), you’ll be charged with cleaning and preparing the space for the next tenant, then repeating the process again.
Then consider the costs of removing a tenant through eviction. Do you know how much an eviction actually costs? You’ll pay to have their belongings removed, and pay for changing the locks—and that’s if the tenant is cooperative. If your tenant intends on fighting the eviction, you can plan on spending hundreds to thousands of dollars in court fees.
Keep in mind that the court often sides with the tenant, so it’s important to prepare for this possibility and have the finances set aside to ensure you’re covered.
Regardless of whether or not there’s a tenant living in your property, you’ll be paying quite a bit for maintenance. Generally, a good rule of thumb is to have at least 6 months of rent reserved per property to cover any maintenance issues and vacancies. Keep in mind that you should budget about 10 percent of your annual rental income for maintenance and property upkeep.
These expenditures can include everything from roof repair to plumbing issues, carpet replacement to professional painting on both interior and exterior of the building. This also includes any necessary yard work and law-enforced upgrades you need to make to the home.
Tenants may also cause damage; unfortunately, renters don’t always keep up the property as a landlord might expect. Make sure you include provisions for a security deposit in your lease.
Whether you’re just beginning on your rental business venture or you’ve been in the game for years, it’s important to consider all the costs associated with this endeavor. Take the above into consideration and protect yourself from unexpected expenses to ensure success and better annual revenue.