Rental property investment is a powerful way to enhance your finances. It can also be a major disappointment if you aren’t prepared. What are some of the costs which commonly catch landlords short, and threaten to turn their passive income dreams into money pit nightmares?
- Unexpected Rental Property Repairs
For the savviest and most experienced investors there are few unexpected items. Yet, newer landlords almost invariably under budget for routine maintenance and emergency repairs. If you aren’t on your game this can cost you a lot more than just losing a single property. Frequent surprises can include needing to change the locks, busted plumbing, broken washers and dryers, AC units, roof leaks, and kitchen appliance malfunctions. Some of these are affordable, others can mean having to come up with thousands of dollars overnight, and potentially even housing your tenants somewhere else while the issue is remedied. Every part of a home has a limited lifespan, and often parts never survive that long either.
- Tenant Defaults
Even the most perfect tenants on paper can default for a whole array of reasons. Divorce, job losses, illness, injury, family emergencies, and even just deciding they are going to go buy a home instead of continuing to rent. This may simply mean cash coming in slower than expected. Or it could mean going months without income, while covering the holding costs, and forking out money to an attorney for an eviction.
- Tenant Turnover
In most cases you just can’t expect to put a new tenant into a property the day the old one leaves. For one you may not know when they are leaving. Secondly, there will virtually always be a need to make repairs and spruce the place up. This could be a pro cleaning job, or it could be replacing appliances, flooring, and bathroom fixtures. Again, these are days with holding costs, but no income coming in. If you are not a full time investor then you’ll also probably have to deal with marketing. That means having ads created and paying for them. This is why experienced firms are constantly working on maintaining a tenant waiting list.
- Property Vacancy
Not only does this mean failing to bring in rents, cash flow, and positive returns, it also bring more risk. There is risk to the sustainability of your entire finances. How many empty properties can you keep covering the holding costs on with your paycheck from your day job? Then there is increased risk of squatters and vandalism to vacant properties.
We should all be aware of property taxes which generally seem to go up every year. Then there are income taxes and capital gains taxes. These can cause investors massive problems if not prepared for. The most notorious characters of our country’s history seem to have been able to get away with everything and anything, except tax evasion. You can actually pay a lot less on money from real estate investment than a regular job; if you plan well. Or you could get hit with a tax bill for tens of thousands of dollars that you don’t have the free cash for. Self-directed IRAs, 1031 exchanges, and having a great accountant and tax strategy can help.
There are a lot of unexpected costs of being a landlord. Some ways to be better prepared and minimize these expenses include setting aside capital reserves, hiring a professional property manager, choosing turnkey property, engaging in real estate crowdfunding, and getting insurances and home warranties.