Costs That You May Missed While Investing In Rental Properties
Nowadays more and more people are getting into the business of creating passive income and aiming to retire early and become part of the freedom class. [link to another article] Out of this wave, many have turned their attention to rental properties. Purchase a property, rent it out and then rest in your backyard or go on trips in Grace while receiving checks in your bank account every month. Isn’t that nice? While if you have set your mind on becoming a landlord and establish rental investments as part of your pass income stream, here is a more realistic picture. While you are conducting your due diligence and getting ready to purchase a property with nice Cap rate or Cash on Cash, here are some costs you may consider adding to your calculation other than typical property tax, insurance, property management fees, immediate repair cost and etc.
1. Maintenance Cost
When you purchased a property without a tenant in, you are responsible for setting up water, electricity and gas. Those related expense during showing and vacant time are out of your own pocket. In addition, if your property is with a nice yard, you are responsible for the yard maintenance due to specific state regulation. In some occasion, there could be an accident like theft happening on your property since it is vacant and vulnerable. For example, people may steal your external AC units, which is not cheap at all. Thus getting property security and purchase property insurance is fairly important
If your property is rented, there are still plenty of repair and maintenance expense from issues identified by the tenant. However, it is not the worst. Some issues if unidentified could result in a huge increase in your bill. For example, a leak which identified early may be only $50 but left unattended could easily result in mold and cause you a $5000 bill. Thus a regular check like half a year is optimal. Even the check may cost you some money but remember you are playing the long game here. For maintenance, tell the inspectors to check the following areas in particular:
leaks: toilet valves and your angel stops. Caulk the tubs and the bathroom sinks
detectors: smoke and carbon monoxide detectors
To sum up, for maintenance, you need to take into consideration the following expense items
Before property leased: Water, electricity, gas, yard maintenance, insurance and safety.
When property leased: safety inspections on leaks and detectors above to avoid even bigger expenses.
2. Pricing the unit wrong could cost you more money.
Less money is better than no money. When you are renting your property, make sure the pricing is competitive based on the market you are in and your property condition. In particular, during the pandemic when people are moving back to their parent’s house to save costs, there is a lot of vacancies in many properties. It is better to get your unit leased than having them stay on the market for a long time. Remember the expense identified above that you need to be responsible while the property is vacant? It hurts more when you don’t have any revenue coming in. Talk with your PM company and do your market research, pricing your property right.
Even before or post-pandemic, when you thinking about increasing your rent, you need to pay attention to rent control if your state has one (e.g. AB-1482 in California). Not knowing something could not be used as an excuse in court to defend yourself. Litigation could be costly. Thus make sure you know what you are doing or consult someone who knows.
It does not mean you should just lower your price and accept anyone who wants to rent. You or your PM company still need to do property background check of your prospects. Always remember you are playing the long game. Even less money is better than no money, bad tenants are so much worse than no tenant. What makes things worse is that bad tenant who damages your property and also do not pay rent. Once again, always think and plan for the long run.
