Whether you are looking for a passive income, supplementing your retirement savings or building wealth for the future, owning rental properties can be a smart move. Vast fortunes have been made in real estate, and some of the most successful businesspeople have built their empires on apartment buildings and rental homes.
But before you join the ranks of those wealthy landlords, you need to learn the ropes. Jumping into the real estate game without the right preparation could leave you vulnerable - and end up costing you more money than you make. Here are six unexpected things that can cost you money as a landlord.
#1 - An Empty House or Apartment
A vacant rental home or apartment costs you money in two ways. Every day your rental space sits idle is one more day it is not earning any money. At the same time, the costs associated with owning the property, from maintenance to real estate taxes, are still stacking up.
It may not be as easy to keep tenants in place as you think, so do your homework and be prepared for the inevitable. Hopefully you will get great tenants who stay for decades, but chances are there will be some vacancies along the way.
#2 - An Emergency Repair
From a broken furnace to a clogged toilet, emergencies happen, and when they do you will need to respond. Emergency repair costs can add up quickly – and take a serious toll on your budget.
You may not be able to predict the next emergency, but you can be certain it will happen. Building some additional funds into your landlord budget will help, so you will not be blindsided by the next repair bill.
#3 - Damage by Tenants
It is a sad fact that tenants tend to treat their homes worse than homeowners. The reason is obvious – renters do not have a vested interest in maintaining the property, since it is the landlord who benefits.
Given this reality, landlords should expect some level of neglect, but sometimes that neglect crosses the line into actual damage. Tenants can do a lot of damage to your property, and the cost of repairs could easily exceed any security deposit they provide.
Tenant damage is one of the biggest issues out there, so screen your renters carefully, check references and do what you can to reduce the risk. You may not be able to completely eliminate the danger, but you can take steps to mitigate it.
4 - A Plunge in Property Values
The total return on a rental property includes two components – the annual rent roll and any appreciation in property values. But home prices and apartment building values do not always rise – the 2008 housing crash and subsequent recession are proof of that.
A sudden plunge in property values could cost you serious money as a landlord, and put you underwater on your mortgage. It is important to be prepared for this eventuality, so you can recover if property values temporarily fall.
5 - An Increase in Property Taxes
Across the country, property taxes fund everything from local school districts to senior citizen programs, but they can hit landlords especially hard. Worst of all, property owners have little, if any, control over the size of their property tax bills.
Other than voicing concern with elected representatives and attending local meetings, there is not much landlords can do to control their costs. A sudden rise in property taxes could cause your costs to soar, reducing or eliminating the profits you had been counting on.
6 - Higher Property Management Fees
Hiring a property management company is a good way to take the pain out of being a landlord. When you hire a property manager, they can handle everything from collecting rent to fixing broken plumbing, but those services come with a cost.
An increase in property management fees could reduce your profits and harm your fledgling real estate empire, and as with property taxes, you have little control. You can always shop around for the best deal, but finding a more affordable property manager who is also reliable is no easy task.
Whether you are an experienced landlord or just getting started, it is important to understand all the costs. Being a landlord can be an expensive undertaking, and the rent you receive will not always cover your costs. The six unexpected costs listed above could reduce your profits and even put you in the red. If you want to succeed, you need to prepare for the worst while hoping for the best.