When homeowners don’t clear as much revenue as expected, they’re quick to blame the apparent economic downturn. While the economy can play a significant role in reducing the power of your income stream, inflation is not the only factor to consider. Unfortunately, many landlords fail to consider certain expenses when estimating their returns. As a result, their estimations poorly mirror the realities of their business.
Do you know if there are expenses you’re overlooking? Do you want a more balanced sheet of your income and expenditure? Stick around as we explore the hidden costs of owning a rental property.
What are the Common Rental Property Expenses
Taxes and Fees
As a property owner, there are several taxes and fees you’re required to pay. However, losing track and forgetting some of these expenses is also easy. For example, landlords can legally exempt travel costs from their taxable income. This law applies beyond gas fares to other costs like licenses and maintenance. Without proper knowledge of these provisions, you risk paying more than you have to in tax and shaving your interests.
Another typical rental expense is vacancies. Although, many landlords seem to assume that an empty apartment neither gains nor loses money. On the contrary, a vacant unit costs you money every day it’s empty. After all, you still have to cover expenses like property taxes, minor maintenance, and some utilities. Thus, it would be best to account for vacancies as an expense instead of a simple inconvenience.
Running a rental property is not a one-person job. To own a successful real estate business, you must learn to delegate specific tasks to more skilled professionals. For instance, if you’re going to court, you should defer to a legal adviser even when you’re right. Their advice can make the process smoother and guarantee a win. However, some property owners wind up with lousy professionals while looking to find a cheap alternative. Getting the wrong advice from mediocre workers can make your business less efficient. Thus, it is vital to thoroughly research your counsel, whether a lawyer or rental management service.
Insurance is another expense landlords tend to overlook. While that might be negligible, property owners paying a hefty premium could significantly shrink your profit margin. Hence, it would be best if you always considered how much you pay for coverage when setting the rent. If you’ve taken insurance from different providers, sum it up with other expenses to reach an accurate figure.
Maintenance is one of the most common costs of owning a rental property. Even with the right tenants, and proper care, you cannot escape damages from wear and tear. Thus, it would be a gross oversight if any landlord were to overlook such recurring costs. Besides, failing to maintain reasonable living conditions could land you in hot water if tenants decide to sue.
Many landlords might not budget for legal expenses because they don’t see themselves needing one. Even when they hire an attorney, it’s often limited to representation in court cases. Thus, they usually pay out of pocket when they need to consult a lawyer. However, ideally, you should seek legal counsel for other purposes. A lawyer can help you clear off pitfalls when finalizing the purchase of a house. These professionals can also help you create a valid lease between you and your tenants.
Budget Setting Tips for Unexpected Expenses
Create a List of Common Expenses
Budgeting rental property expenses on an annual or quarterly basis are crucial. It can help you plan for high costs and keep your finances on track. Thus, the best place to start would be to create a list of everyday expenses. You should factor in standard costs like taxes, maintenance, and salaries. Although, remember to consider hidden ones such as insurance and vacancies. Besides helping you create a budget, it can also help claim tax deductions.
Make an Estimate
Make an estimate next to each point with your list of everyday expenses. In other words, tally up the amount you would require to settle each bill. However, it might not be that straightforward for every cost. For instance, you could go an entire year without any plumbing issues, but you might need to replace a broken circuit board or fix some shingles. That’s why experts typically use calculations like the 1% or square footage formula to make more precise estimations.
To sum up, we highlighted that there are certain expenses landlords tend to overlook. These hidden costs of owning a rental property can skew your expectations and lead to disappointing returns. However, you get a more holistic tally when you factor in expenses like taxes, vacancies, insurance, and maintenance. Also, creating a budget can help you bounce back from unexpected costs. If you’d like an expert to help you plan your finances, consider hiring a professional property management company.