They say investing in property is a great way to earn passive income, but that’s not to say that being a landlord is easy. There are many issues and responsibilities that landlords have to be aware of simultaneously, and one of those things is tracking expenses. While renting out property can be a great way to earn money, it also costs money to do so successfully.
If you’re trying to put together an accurate budget for your investment property, keep this list of rental property expenses in mind:
When you buy a property, you are responsible for all of the fees associated with closing the deal. This could include mortgage application fees, valuation fees and other costs. Closing costs can end up costing anywhere from 2-5% of the purchase price, so it is important to consider them in your initial budget.
It can be tempting to save some money and skip the home inspection process, especially if you’ve toured the property multiple times and do not see any signs of damage. But a home inspection is a critical (and sometimes required) part of the home buying process. If you’re buying a rental home, a home inspection will give you an accurate overview of all systems of the home to avoid any costly surprises once you start renting it out.
If you are a landlord for multiple properties, it can be difficult to be everywhere at once. Hiring a property management company can help take care of the day to day responsibilities of managing multiple properties. This ensures emergencies get taken care of right away, properties are looked after properly, and tenant issues are handled quickly. Some property management fees charge a flat rate for their services, while others take a percentage of the generated income. Either way, property management fees are a necessary expense for investors juggling multiple single-family properties or a multi-family unit. On average, UK landlords can expect to spend 10% of their monthly income on property management services.
When putting together a list of rental property expenses, regular maintenance is probably one of the first things that come to mind. As a rule of thumb, it is recommended to dedicate 1-2% of the property’s value to home repairs and maintenance each year. This will give you a budget to take care of some of the most common rental property issues such as:
- Broken appliances
- Plumbing issues
- Electrical issues
- Water leaks
- Roof repairs
Maintenance and repairs can eat up a significant part of a rental property budget, especially if you’re managing multiple properties. Make sure as you are calculating costs that you factor in everyday maintenance to your numbers.
Upgrades and Renovations
Regular maintenance is one thing, but upgrades and renovations are considered a separate category. These are things that are done far less often than regular maintenance, but end up costing significantly more. These are things that improve the look and feel of the property while also increasing its value. Upgrades and renovations aren’t as important as regular maintenance, but to generate higher rents, you will need to set money aside for major renovations. You may only do one or two major upgrades a year, but it is still important to factor these costs as part of your rental property expenses.
Even when a property is not occupied, it still costs you money. A vacancy means there isn’t rent coming in, but there is still mortgage, taxes, and utility costs to be paid. Some things you can do to reduce the time between tenants include pricing your property competitively, get creative with advertising, accept pets (this dramatically opens up your pool of qualified tenants), and improve curb appeal.
Some landlords are in such a rush to fill a vacancy and start earning money that they relax a bit on tenant screening requirements and background checks. Skipping this step often leads to problem tenants that end up costing the landlord more money. While vacancies can be expensive, it’s important to take the time to find the right tenants.
Speaking of finding the right tenants, landlords should calculate advertising and tenant screening costs as part of their regular property expenses. Many landlords hire property management companies or specialized tenant screening services to run background checks on their behalf. Some tenant screening services start as low as £15-20, and others that offer more extensive screening services and a la carte options can cost significantly more. The only thing more expensive than a vacant property is a property occupied by a bad tenant. Do your research and spend the money to screen tenants appropriately.
Owning a rental property can be a lucrative investment, but it does require you to put money in to get money out. Skimping out on repairs, tenant screenings, or upgrades to save money will only hurt your property (and profits) in the long run. Take the time to carefully consider all of your rental property expenses so you can budget accordingly and start generating positive cash flow right away.
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