5 Expenses New Landlords Should Be Aware Of

expenses new landlords should be aware of

Purchasing real estate with the intent of renting the space to tenants can be a great way to earn a decent return on your investment, but only if you do it right. You can purchase a house or a condo in a popular tourist town and lease it out on a weekly or a monthly basis. Similarly, you can purchase the same type of dwelling in your own city and rent it on a monthly or yearly term. You can also purchase commercial buildings and rent the space to business owners. Another option is to invest in apartment complexes. Personally, we currently share ownership of seven apartment complexes with other investors. These are just a few examples of how you can become a landlord and make money with real estate. You may have come across others as well.

Quite often when people consider purchasing a new property they compare what their mortgage payments will be to what the space may rent for to determine if they will make a profit each month. If they see that they will break even or make a profit of a few dollars, they may consider the property a good investment and eagerly begin the purchase process.

There is one common denominator that landlords share, and that is the expenses that come along with owning any property. And all of those expenses need to be factored in as a part of your budget for your real estate investment before you say yes to any purchase. If you skip this step you may find yourself quickly losing money instead of making a profit.

Expenses New Landlords Should Be Aware Of

Repairs and Maintenance

One of the biggest expenses that a new landlord needs to be prepared for is maintenance fees.

Regular things such as painting, cleaning carpets, and cleaning the entire property inside and out, in between tenants, can add up quickly.

Aside from that you may have expenses to deal with even while you have a tenant.

Appliances break down all the time. The furnace and hot water tank may simply stop working. Or the air conditioner may break down. After a number of years the windows and the roof may need to be replaced. One day you may get a call about a broken pipe and water damage.

And depending on the type of property you own, there may be items outside that need to be repaired or replaced.

Come up with an estimate of how much money you need to have on hand every year to deal with these expenses. Take into account the age of the property and recent renovations to the property.

Include your estimate in your yearly calculations as you try to figure out whether or not you can afford to purchase a new property.

Insurance

Even if your tenants have insurance for their belongings as well as liability insurance, you still need to have property insurance on every property you own too. Speak to your insurance agent about the property that you are considering purchasing and find out exactly what you will need and how much it will cost.

While you can possibly predict that your property may be vacant after a lease expires, it is very hard to predict a situation where your tenant will default on their rent payments. For situations like that it is very important for you to have rent guarantee insurance from CIA to protect yourself.

Vacancies

It would be great if your vacation property or the house you purchased down the street was occupied everyday of the year, and your bank account just kept growing. Unfortunately there may be a time when it will be vacant for either days or even months at a time. Make sure to allocate some of your income towards a vacancy fund that you can draw from to pay your mortgage and other expenses when your property is unoccupied.

Other Fees

Other possible fees that a new landlord needs to factor into their budget are:

  • property taxes
  • condo fees
  • community fees
  • homeowners association fees

These fees will vary based on the type of property you purchase and the location. You need to do your research to make sure you understand exactly which fees you will be charged, how much they will be, and how often there may be an increase.

Business Administration Fees

Becoming a new landlord and investing in real estate as a way to make money can be very exciting as long as you do not make any major mistakes. As soon as you do the excitement disappears and you may find yourself quickly losing money instead of making money.

To keep yourself on track and to ensure that you are doing everything correct you will want to hire a lawyer and a business accountant. You will need your lawyer when you buy and sell properties, and you will also need your lawyer if you have disputes with your tenants that require legal action.

A good accountant will come in handy when it is time to do your taxes. In fact, you should speak to your accountant before you even buy your first property so that you are completely aware of how owning a rental property will affect your taxes, as well as knowing exactly how to deal with all of the expenses you will incur from a tax perspective.

It is very easy for a new landlord to get in over their head when it comes to real estate. Initially it looks like a great way to make money. But it is important to really think about all the time and money something like this takes before you buy your first property.


Comments

    • DC @ Young Adult Money

      DC @ Young Adult Money 11/11/2013 5:52 a.m. #

      Vacancy is the biggest expense that I think new landlords should consider. We have a rental apartment in our basement and it would be a sizable expense to not have someone in their for an extended period of time. That income can make a big difference in your personal finances and a loss of it for even a few months can take a toll.

      • Sicorra

        Sicorra 11/11/2013 12:50 p.m. #

        Yes, the loss of income from a vacancy can add up quickly and it is something that landlords need to plan for. It may never happen, but if it does and the person doesn't have the cash to finance the mortgage and other expenses while it is vacant then they can quickly get in trouble.

    • getrichwithme

      getrichwithme 11/11/2013 8:24 a.m. #

      Here in the UK - I have to pay nearly £400 ($600) a year to be a registered landlord.
      I also have to pay for an annual natural gas safety certificate, and soon I will have to pay for an electrical safety certificate too!
      Being a landlord sounds a lot easier than it is in reality

      • Sicorra

        Sicorra 11/11/2013 12:52 p.m. #

        Wow...that is a lot of additional expenses. I wasn't aware of that for the UK. Thanks for pointing that out.

        And you are so right, it does sound a lot easier than it is. Almost sounds like a glamorous way to make money, but it can easily turn into a nightmare.

    • Shannon @ The Heavy Purse

      Shannon @ The Heavy Purse 11/11/2013 10:30 a.m. #

      Great advice, Sicorra. Real estate can be an excellent investment but you need to make sure it's right for you. Some people don't think beyond how much they can charge above the mortgage payment and forget to think about all those expenses you mentioned. Maintenance and vacancy can definitely impact your bottom line.

      • Sicorra

        Sicorra 11/11/2013 12:58 p.m. #

        Thanks Shannon! Adding all of those expenses into your rental fee is very necessary, and you are right, many people do not realize that they need to charge more than what they are paying on the mortgage each month.

    • Edgar @ Degrees and Debt

      Edgar @ Degrees and Debt 11/11/2013 12:13 p.m. #

      Administration fee's was a great topic to include on this list and one that many dont always factor in. I am a Realtor as well so I have dealt with landlords and sometimes when they are new to the concept they forget about administrative costs of owning rental property.

      • Sicorra

        Sicorra 11/11/2013 1:01 p.m. #

        Thanks Edgar! I can understand how some of your clients could easily forget about admin costs. So many deals look great until a person factors in all of the additional costs. Once they do that and see how much they have to charge in rent to make a profit they see that finding a suitable property isn't as easy as they thought it would be.

    • Fehmeen

      Fehmeen 11/11/2013 1:03 p.m. #

      I think repair and maintenance is an often-overlooked expense because new landlords may assume the tenants will treat the home as their own. I know a landlord who was determined to find the most suitable family for his apartment, hoping they would maintain the living space (keep it clean and tidy, etc) but was pretty shocked to see the doors themselves needed replacement after the tenants left.

      • Sicorra

        Sicorra 11/12/2013 7:40 p.m. #

        It is always difficult when you think you can trust someone and find out you can't. But even when you find tenants that do take care of things as if it was their own things still break down and the landlord is responsible for those costs not the tenant. A landlord that doesn't calculate that into their budget is headed for trouble.

    • Corina Ramos

      Corina Ramos 11/11/2013 2:31 p.m. #

      My husband and I often talk about renting out this house when we get ready to move closer to his job but we bring up these very same issues like repairs and insurance and the conversation ends there.

      Although it can be lucrative it can also be a pain in the butt. We'd have to watch out who we rent to, how they take care of the house, etc...a lot of responsibilities.

      Thanks for sharing these tips! Hope you're having a great day! Catch up with ya later!

      • Sicorra

        Sicorra 11/12/2013 7:41 p.m. #

        It can definitely become a nightmare quite quickly, but on the flip side it could be a nice extra stream of income. So hard to predict.

        • Corina Ramos

          Corina Ramos 11/15/2013 10:35 a.m. #

          That's true. I wouldn't mind renting out this one. We've already made major repairs like plumbing and electricity....Who knows :).

          Thanks for sharing girl! Happy Friday! Catch up with you soon.

    • krantcents

      krantcents 11/11/2013 3:16 p.m. #

      When I owned rental property, I used to set up reserves for those unplanned repairs to avoid surprises.

      • Sicorra

        Sicorra 11/12/2013 7:42 p.m. #

        Good point.

    • Christy Garrett @ Uplifting Families

      Christy Garrett @ Uplifting Families 11/11/2013 7:20 p.m. #

      If you plan on using an agent to monitor your property, they charge a fee for their service. This is a great idea to use this service if you plan on moving out of the area, they can go by to inspect the property and handle your maintenance issues too.

      • Sicorra

        Sicorra 11/12/2013 7:44 p.m. #

        Yes, property management companies in our city charge 10% of the monthly rent as their fee. But that fee is usually included in the rent to the tenants. They do send out people to deal with the maintenance issues, but they never inspect the property even though someone may think they are.

    • Brian @ Luke1428

      Brian @ Luke1428 11/11/2013 7:45 p.m. #

      "If they see that they will break even or make a profit of a few dollars, they may consider the property a good investment and eagerly begin the purchase process." This is a big issue that you rightly pointed out. Potential investors just don't think this through. Properties have to clear BIG each month in order to be real profitable. As someone with several properties, I can say repairs (big ones) will eventually come and clearing only $100 a month won't cover those expenses. Nice post!

      • Sicorra

        Sicorra 11/12/2013 7:47 p.m. #

        Thanks Brian! And yes you have to clear big to make a profit in the long run. Years ago we considered investing in rental properties and we had an investment calculator where we inputted all the costs, estimated expenses, along with mortgage and interest, and price of the house. We compared the final monthly total against what other homes in the area were renting for and quickly realized that we wouldn't be able to compete because the initial price of the houses were too high. It was a good lesson without going through the whole process.

    • Corinne

      Corinne 11/15/2013 12:56 p.m. #

      Great post Sicorra! I agree that becoming a landlord can be a lucrative career choice, but like any entrepreneurial job, it's important to be educated in the pitfalls. My grandparents are landlords, and charge their tenants peanuts. I'm still not sure how they stay afloat!

      Have a great weekend!

      • Sicorra

        Sicorra 11/15/2013 5:21 p.m. #

        Thanks Corinne! I wonder why your grandparents charge so little. Perhaps they have simply never raised their rent charges.

        Have a great weekend too!

    • Arelis Cintron

      Arelis Cintron 11/15/2013 1:13 p.m. #

      Wow! I always thought of renting a house or an apartment. My parents rent one now and I know its a lot of work and things can go unexpectedly like a tenant being behind on their rent. Some states in the US have laws in place protecting a renter so sometimes the owner gets the short end of the stick.

      • Sicorra

        Sicorra 11/15/2013 5:23 p.m. #

        We have Landlord and Tenant laws in some provinces as well that protect the Tenant quite a bit. And you bring up a very good point, before investing, a potential landlord should become very familiar with the rights they will have and the rights the tenant will have.

    • Tanya @ Eat Laugh Purr

      Tanya @ Eat Laugh Purr 11/15/2013 2:54 p.m. #

      People see shows on HGTV and don't take the time to figure out the true cost. They just automatically assume it will be fantastic and jump in feet first. While I need to buy my own property before I'd consider rental properties, I'm not 100% sure it's right for me. I'd definitely have to use a property management company. I can barely change a light bulb and the idea of dealing with a bad tenant makes me nervous.

      • Sicorra

        Sicorra 11/15/2013 5:26 p.m. #

        I agree Tanya, the idea of dealing with bad tenants makes me nervous too. And you are so right about HGTV. We actually have a show on the Canadian version of HGTV that is all about buying and renovating a house that you can rent out part of it and live in the other half. The show makes it look so easy and makes it look like the owner will make lots of money when the deal is done, but in fact the owner usually buys a home that is full of expensive problems because they do not do an inspection, and then the contractor that is doing the rental suite renovation adds those other problems on to their invoice so the new homeowner ends up paying a lot more than they originally intended. Very scary.

    • Maggie@SquarePennies

      Maggie@SquarePennies 11/15/2013 3:52 p.m. #

      Great things to consider! It helps if you are handy with repairs and painting after renters leave. You can make good money as a landlord, but you'll have to put in the time to do it right.

      • Sicorra

        Sicorra 11/15/2013 5:27 p.m. #

        True Maggie! Being handy enough to do the maintenance in between tenants will save you money for sure.

    • CarolB

      CarolB 11/15/2013 3:59 p.m. #

      We contemplated buying a vacation home once, with the idea of renting it when we were not using it. For much the same reasons you listed here, we opted to forego that idea and travel instead!

      • Sicorra

        Sicorra 11/15/2013 5:30 p.m. #

        A vacation home in a good location would be a good idea. You could definitely hire someone to manage it for you and ensure it is always occupied. But I love your plan of simply traveling and skipping any possible hassles of renting.

    • Donna

      Donna 11/16/2013 6:48 p.m. #

      My parents have a couple of rental properties, and I know that my Mom will tell you that there have been times when she wondered if it was worth it. :)

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