While a portfolio of buy-and-hold properties is the way to long-term real estate investing success, owning a property comes with a lot of expenses. This is why, no matter the properties you own, you need to understand the numbers, because miscalculating even few of those can catch you off guard and turn a profitable looking property portfolio into a negative one. A negative cash flow property with be a load on your portfolio and will make you second guess your future purchases and expanding your investments.
Most of the expenses and obvious and hard to miss, but there are several that are easy to overlook since they don’t occur in the very beginning, but they do make all the difference with your cash flow. Go through the list of these 7 hidden expenses and calculate which ones apply to you so you can manage your income effectively and get the best return on investment for yourself.
This is one of the most unpleasant things that a landlord might experience. When eviction happens you lose your monthly income and have to pay to get the issue rectified. It’s a good idea to hire an attorney even if you are familiar with the whole process because an expert can speed things up and make it go away as smoothly as possible.
Another thing to consider is that when the day of eviction comes your property won’t be in a very good condition. This means additional costs to fixing up the property for your next tenants.
If you have the chance to manage and maintain the property yourself you might be able to save some $$ down the path, but you should know that there are costs involved in this too. Namely, if you are going to maintain the exterior yourself and cut the grass, you need to have a good lawnmower at the property, along with a snow blower, as well as a good set of tools and anything else to take good care of it.
Except for the taxes and insurance of the property that you’ve probably already calculated, there are other unexpected expenses that are tight to the area you own the property in. For instance, if your property is located near a number of colleges and universities the town may impose a student housing permit fee. This is required as long as you are currently renting or may want to rent to student tenants in the future, and most likely this won’t present such a big load on your budget, but it’s something that needs to be accounted for.
Reaching out to the town planning and zoning every few weeks or asking to be put on an email list to be notified of any changes, is a great idea of avoiding unpleasant surprises.
Owning properties require getting an insurance for each one of them. This is something everyone recommends, especially if you don’t live in the property, it’s vacant or you are renting it to someone else. Having insurance covers your property for things like flood damage, fires, theft, and so on. The insurance is also likely to cover you for the things like malicious damage from the tenants, a lack of rental income from tenants who have damaged the property or failed to pay rent etc. Every different insurer is going to offer a different sort of landlords insurance to make sure you’re clear on what they offer.
Another thing to take into account when insuring your properties is the environment. If you know your property is located near an environmental risk like floodplain, or near water, you should consider flood insurance as an additional investment. Insurance may sound like an unnecessary add-on but costs of fixing or replacing things can be incredibly expensive.
Whether you have someone living on your property or not, maintenance is needed at some point. This doesn’t have to be a huge burden on your budget, but if you leave things like changing locks, maintaining furniture, fixing a clogged toilet, hanging, they might add up and cost more than a thousand dollars when you decide to do them all at once. You also need to factor in seasonal items such as cutting the grass and snow removal. There are also costs for seasonal maintenance on the furnace, HVAC and house cleaning after every lease.
When you are buying your properties with the intention of renting them you hope for the best and never expect a vacancy for more than few weeks. However, things might be different in practice, and you will realize this the longer you own rental property. To think of this realistically, you need to ask yourself what you would do if your tenant suddenly stops paying. Keep in mind that the eviction laws keep you protected but they don’t work overnight. Even if you win the case, it still might take few weeks or even months for things to get sorted out. What you can do to avoid the trouble is placing part of the rent aside as a vacancy fund. Planning ahead is crucial because unexpected vacancies can happen with any tenant and to any landlord.
Having a large portfolio of rental properties might be something hard to keep up with. This is why you might need to hire a rental manager to do the renting and all the things related to it. This will cost you anywhere from 6% to 10% of the rental income coming in. Rental managers will also often charge a fee of around 110%-150% of one week’s rent, whenever a tenant moves out and they need to get a new tenant.
Hope this list helped to put certain things into perspective and to make the whole investment picture clearer. In case you have encountered with other hidden fees and expenses, make sure to leave them in to comment section to help other real estate investors as well.
If you’d like more information on the San Fernando Valley or Los Angeles, or to have help looking for your next home, please feel free to reach out! I’m happy to help, no obligation.