Every rental property you own should be treated like its own individual business. Like any business you need to know everything that impacts your bottom line. In many cases there are several little things that can eat away at your cash flow if you are not careful. Alone they will not break the bank, or in some cases even be noticed, but this doesn’t mean they don’t have an impact. As a landlord, you always need to expect the unexpected and have be ready for anything. One month things are going along great and the next you are facing a sudden eviction and vacancy. The better you know every expense and every potential issue the easier they are to deal with. Here are six hidden fees that can run a rental property.
- Maintenance. Let’s face it: something will need to be repaired at some point in every lease. Even if your property is updated there are always minor items every few months. Something like a clogged toilet is not a big deal but you still need to call a plumber and get someone to fix it. Over the course of the year you can easily rack up $500 or more in incidental maintenance. You also need to consider seasonal maintenance items on the HVAC, furnace & oil tank. This doesn’t include fall leaf removal or spring cleanups. Minor maintenance alone will not break the bank but if you add everything up you could easily approach one monthly payment.
- Fees. Do you know if there are any fees or costs to rent in your area? This may seem like an obvious question but some towns charge an annual application fee. This is especially prevalent if you are renting in a college town to college students. This annual fee is in addition to any property inspection that is required. The fee is typically somewhere around $150 a year but in certain towns that number can be doubled.
- Gas/Travel Expenses. It is not uncommon for a rental property to be a few towns over from where you live or work. If you have a property manager they will handle most of the minor issues with the property and you will avoid the excess travel. However, a property manager will take roughly 10% of the total monthly rent received. The alternative is to handle any issue that comes up on your own. This requires you to drive to the property every time something pops up. If the property is even ten miles away you are looking at twenty miles round trip. If you do this five times a month you have 100 miles which can be a couple of fill ups. This is in addition to the wear and tear on your car and the miles if you have a lease.
- Time. You can’t put a price tag on your time. This sounds like a corny cliché but it is true. Running a rental property is time consuming. If you opt to manage the property on your own you need to embrace the fact that you are going to spend more time than you think at the property. In addition to the travel time there are always minor time-consuming items that must be dealt with. Anything from reading tenant applications to fielding phone calls from tenants will eat away at your day. You can plan on averaging at least a few hours a week for the property as well as a few hours on the weekend. Time is a precious commodity that you must consider.
- Tools. Even though it is a rental property it is still your property. The interior may not have to be fully furnished but there are still some basic items that are needed. You should plan on having a few shovels, brooms, rakes and a garbage can for the kitchen. If you are self-managing you are going to need a lawnmower for the grass and maybe a snow blower for the driveway. It is also a good idea to have a basic set of tools as well as a power screwdriver for the unexpected interior fix. Your set of tools doesn’t need to be great but they should be reliable to use in a pinch.
- Vacancy/Eviction. No landlord ever thinks their tenant is going to stop paying. When it does it usually catches you completely off guard. You may have a great tenant who loses their job or gets sick and everything changes on a dime. Within 30 days you will face a vacancy or an eviction. A vacancy hurts in two ways. The most obvious is the immediate loss of rental income. The second is the need to find a new tenant. You may have to brace for at least 60 days, and possible more. Without ample reserves to cover the mortgage payment you can hurt your credit that can impact other areas of your business. A vacancy/eviction is one of the worst things that can happen to any landlord but must be anticipated.
You should always have reserve funds for every property you own. In a perfect world, you would have at least three months of your mortgage ready to use at any time. Whatever you think your expenses are with the property you should tack on an extra 10% for miscellaneous items. If you don’t use them you can add them to your reserves but you will use them at some point.
