Owning rental properties is a double-edged sword. On the one hand, it can be an exciting venture full of investment possibilities. But on the other hand, there’s a hidden world of costs that often go unnoticed, quietly nibbling away at your profits.
These overlooked fees add up quickly and can make or break a rental business depending on how they’re handled. With careful planning and analysis, you can navigate these potential obstacles and succeed in this exciting endeavor.
In this blog post, we’ll explore some of the costs that landlords may not be aware of or tend to overlook. We’ll also discuss how to manage them for your rental business best.
Let’s get started!
Maintenance Fees
Maintenance fees are one of the biggest costs that rental property owners aren’t aware of. Whether it’s a leaking pipe or a broken appliance, repairs are almost always necessary and can cost a lot of money. While these costs may seem low initially, they can add up and become a headache later.
Establishing a preventative maintenance program is the best way to manage maintenance fees. This entails regularly inspecting and servicing all of your rental units and appliances to avoid any costly repairs in the future.
Vacancy Costs
Vacant properties are a real nightmare for any landlord. Not only does it mean lost potential income, but you’ll also be responsible for all the regular expenses associated with the property. These can include taxes, insurance costs, utility bills, and more.
To calculate your vacancy costs, you’ll need to determine how much rent you could’ve earned from the vacant property. For example, if the monthly rent on a single-family property is $900 and it remains vacant for two weeks (14 days), then your total vacancy cost would be:
$900/30 = $30 per day
$30 x 14 = $420
Also, consider other costs associated with the vacancy, such as advertising and any repairs needed to make the property rentable.
For multi-family properties, it’s more complicated. You’ll need to account for the total rent that could have been earned from the vacant units as well as any additional costs associated with filling those vacancies.
Vacancy rate = Unoccupied units x 100 / total number of units
In simpler words, if you had a 150-unit property and 30 were unoccupied, your total vacancy rate would be 20%.
A well-thought-out strategy to manage empty units is essential to prevent financial stress. This may include lowering your rent rates or offering incentives to attract new tenants. Look for ways to improve your property’s condition and appeal to the rental market.
Small improvements to your property can make it an attractive option for potential tenants and reduce your vacancy rate.
Legal Partner Cost
While partnering with professional legal assistance seems like a great decision, it’s important to realize that if you choose the wrong professional or experience a high volume of legal work, you’ll incur higher invoices than expected.
Confirm the professional’s expertise and research their work history to avoid these unexpected costs. Additionally, discussing payment arrangements and understanding the fees associated with each legal service can help you stay on top of your costs.
Property Taxes
Property taxes are unavoidable and often the largest expense for a real estate investor. Depending on where your rental units are located, you could end up paying significant amounts of money to your local municipality in property taxes.
The best way to avoid unexpected costs associated with property taxes is to research tax rates before investing in a rental unit. Also, understanding the deductions available to real estate investors and proactively planning for them can help minimize the unexpected costs associated with property taxes.
Contractors’ and Vendors’ Charges
When you own rental properties, you must hire contractors and vendors to tackle minor and major projects. This means you’ll have to pay for the skills and expertise of plumbers, electricians, painters, cleaners, and landscapers.
These costs can quickly add up depending on the requirement and the type of work you need to get done. Sometimes vendors charge more than normal if some things need to be done outside of business hours, and this is something that landlords often overlook when budgeting.
Before hiring contractors or vendors, it’s crucial to do research to make sure you receive the best value for your investment. Try to get quotes from different companies and negotiate the best rate. Don’t hesitate to ask for discounts, especially if you want an ongoing relationship with a particular service provider.
Wrong Tenant Selection Cost
What is the cost of having a tenant who isn’t fully vetted? Not properly screening tenants can open the door to serious issues, including non-payment of rent and property damage. Although the costs of finding a quality tenant are often underestimated or overlooked altogether, neglecting these can result in significant financial losses.
The cost of background checks and tenant credit reports can range from $25 to $50, depending on the services you use.
To avoid unnecessary charges from tenant screening, landlords can consider alternative ways of properly evaluating tenants. Consider utilizing a rental application that details the applicants’ financial information and past rental history.
Final Verdict
Owning rental properties comes with its fair share of hidden costs that landlords may not always notice or accurately account for. These costs can eat into profits if not properly managed. From maintenance fees and vacancy costs to legal expenses and contractor charges, these expenses can add up over time and impact the financial success of a rental business.
That’s why landlords need to understand the costs associated with owning rental properties and plan accordingly.
At Prime 1 Property Management, we understand the challenges of managing property investments. Our experienced team is dedicated to helping our clients achieve their goals by providing high-quality service that goes above and beyond.
With our comprehensive services, we can help landlords manage costs, increase efficiency, protect investments, and obtain a better return on investments. Contact us today to learn more!
