Investing in a rental property is a great way to earn a passive income, but there are a number of costs associated with buying and managing rental properties that should be included when you calculate your returns. We spoke with industry experts who shared the most important rental property expenses landlords can’t afford to ignore.
From the pros, the 25 rental property expenses investors can’t afford to forget are:
1. Property Taxes
Lukas Krause, President, Real Property Management
Some new investors assume that their property taxes will be about the same as the previous year’s property taxes. However, the new market value of the home often results in a tax assessment that can significantly increase the property taxes and eat into profit margins. In addition, investment properties are rarely covered by homeowner exemptions or deductions. New landlords may have a higher tax burden on their investment property.
2. Closing Costs for Your Real Estate Financing
Teddy Shonka, Owner & Real Estate Professional, The Shonka Group
The closing costs of your real estate financing are expenses that are typically forgotten about but should be included when purchasing any rental property. The closing costs include lender fees or origination points, title fees, appraisal fees, and cost of inspection. Rental property investors should always include these costs when preparing for a purchase and when calculating the ROI.
3. Property Management Costs
Brady Hanna, President, Mill Creek Home Buyers
All too often, new investors will go into purchasing their first several rental properties and not account for property management costs because they are going to manage the property themselves. As you grow your investment portfolio, there will be a time when you will need to hire a property manager and you want to make sure that these costs are accounted for.
4. Ongoing Capital Expenditures
Joe Horan, Licensed Broker & Founder, Wrightwood Homes
Whether it’s planned or not, big expenditures happen. They might not happen every year, but they eventually will. Think of these big-ticket items as your capex and put a portion of the monthly rent in a separate account. You can use the “capex funds” to cover the cost when those inevitable expenditures come up.
5. Advertising or Marketing Expenses
Christopher S. Dowler, Owner, Dowler Construction Services, LLC
Whether you’re advertising a new rental property or you have to market it during a turnover, you will incur advertising and marketing costs. Real estate investors should have a budget for this, and they should also know how to factor these expenses into the rent to ensure you get an accurately positive net income.
6. Cost of Unplanned Repairs
Shayan Jalali, Realtor, ShayanJalali.com
It’s important to be prepared for the cost of repairs as they arise. Usually, a rental property is already a few years old. Even if the property has been renovated before you rented it out, there could still be an issue that may arise in a year or two. With this, you should set aside a budget for unplanned repair expenses.
7. Homeowner Association Expenses
Kevin Ortner, CEO, Renters Warehouse
The homeowner association (HOA) expenses should always be included when computing the net income and ROI of your rental property. Some landlords also find a way to include the HOA fees in the rent to pass the expense to the tenants.
8. Budget for Future Vacancies
Odest Riley Jr., President, WLM Financial
Most new real estate investors don’t consider the cost of their rental properties being vacant. It’s important to set a budget for vacancy because this can happen at any time. When a tenant moves out, you can’t always immediately get a new tenant as soon as the property is vacated—but you still have to pay for the ongoing expenses.
9. Roof Maintenance Costs
Philip Mandel, Licensed Real Estate Broker, RealtorPhil.com
As a landlord, you should always have a budget for roof maintenance. The roof is typically easy to ignore unless it starts leaking. If you wait that long, however, it might cost you a bundle to repair. It’s not just a leak, it’s a possible rot in the plywood sheathing, wet insulation, mold, damage to the ceiling that got dripped on, and so on. Regular maintenance, ideally every two to three years, can patch small problems before they turn into expensive ones.
10. Accounting & Bookkeeping Fees
Eugene Gamble, Senior Partner, Property Whisperers LLC
Accounting and booking services are important if you want to be sure that you are maximizing the profits from your rental property. There are costs associated with hiring an accountant and bookkeeper, so you have to ensure that you incorporate such costs in your budget and when you calculate your returns.
11. Broker Fees
Alex Cohen, Licensed Real Estate Salesperson & Chief Commercial Specialist, Compass
Your ROI and net income analysis should always include broker fees or commission if you’re working with brokers to find tenants. This is a common rental property expense that should not be ignored by landlords, even if it’s not a recurring expense.
12. Unclaimed Depreciation Expense
Martha De La Chaussee, Ex-IRS Collection Officer, Mentor, & Advisor, Advocate Tax Group
One rental property expense that investors should not forget is unclaimed depreciation expense from the date the rental property was placed in service to present. Investors need to keep records of prior tax years’ tax returns to make sure all the depreciation expense has been claimed on tax returns. Also, the record of this expense will be required when you sell the property.
13. The Value of Your Own Time
Ryan Coon, Co-Founder, Avail
The most common expense that investors forget is the value of their own time. While investors can save a lot of money by handling things on their own, investors should be conservative when calculating income and should factor in the value of their hard work. If you plan to manage the property yourself, or perform some hard work like lawn maintenance, be sure to pay yourself reasonably.
14. Build a Reserve for Future Legal Fees
Arnold Hernandez, Attorney & Licensed Real Estate Broker, ArnoldHernandez.com
Legal fees are one of the most important expenses real estate investors should not forget. As a landlord, you should always set a reserve for legal-related expenses because you won’t know when you will have to deal with a difficult tenant. You will need to hire legal services in case you’ll have to deal with eviction or other rental-related litigation.
15. Costs of Upgrading the Property
Terence Michael, Airbnb Owner & Mortgage Broker, TerenceMichael.com
Many landlords tend to overlook the cost of upgrades and so they don’t budget for such. However, you’ll need to do upgrades from time to time. Your kitchen sink may get dated. You might need to update your paint. Sometimes, you’ll also need to update your appliances. These upgrades are necessary to make your rental home up-to-date and appealing to renters.
16. Cost of Screening Tenants
Christian Nossum, Founder, The Awesome Nossum Group
Another often forgotten and overlooked rental property expense is the cost of screening tenants. Because of The Fair Credit Reporting Act, you need to get yourself set up and qualified to run credit applications. Although the prospective tenant will most likely be paying their own rental application fee, the landlord often hires a company to assist with tenant screening, credit, background, and civil and criminal checks.
17. Cost of Pest Control Services
Eric Hoffer, President, Hoffer Pest Control
A pest issue can do a lot of damage, not only to the home itself, but to your reputation as a renter. Setting a budget for recurring pest control services is worth the investment. Regular inspection is better as it can protect you from more expensive fixes or having to deal with a full-blown infestation, which will eventually happen if you don’t take precautionary measures.
18. Emergency Expenses
Joan Brothers, President & Licensed Real Estate Broker, Manhattan Boutique Real Estate
Rental property investors should always set aside sufficient cash reserves in case of emergencies. As a landlord, you are responsible for your own property. In case something breaks, you should have the funds to have it fixed or replaced.
19. Lodging Tax for Short-Term Rentals
Rob Stephens, Co-Founder & General Manager, Avalara MyLodge Tax
When engaging in the short-term rental market, such as Airbnb and HomeAway, investors should include the added lodging tax as an additional fee charged to their guests. If investors do not include the lodging taxes in their nightly rate, it will decrease their income because they still have to remit the lodging taxes promptly to the proper tax agencies.
20. Cost for Lawn Maintenance
Shawn Breyer, Owner & Operator, Breyer Home Buyers
One rental property expense that may be easily forgotten by real estate investors is the cost of lawn maintenance. Even if the tenants will mow the property’s lawn themselves, you are still responsible to ensure that your lawn is well-maintained. Your lawn maintenance expense should ideally be included in the rent or should be charged to tenants so it will not deplete your monthly income.
21. Income Taxes
Aaron Bowman, Realtor & Founder, Bowman Realty
Some rental property investors are so focused on keeping their properties occupied that they tend to forget about their income taxes when doing profitability calculations. If your rental business grows and becomes too profitable, you will be charged with a big tax bill at the end of the year. Make sure to set aside the tax portion of your income to prevent unpleasant surprises come tax filing time.
22. City or County Business Permit Expenses
Dan Tenenbaum, Founder, Pacific Crest Realty
Before you can rent your property out, you will need to secure a number of permits from your city or county. There are associated costs for such permits. As a landlord, you should not forget to include this expense when calculating your returns. You should also consider this when pricing your rent.
23. Cost of Builder’s Risk Insurance
Ben Guttman, CPIA Insurance Advisor, North Central Insurance Agency
During a construction or rehab, it’s essential to get builder’s risk insurance to cover the property under construction. By the time your property is ready to be rented, you should not forget to factor in the cost of builder’s risk insurance in calculating your profitability. This should also be considered when deciding the amount of rent.
24. Dwelling Fire (DP3) Insurance Policy
Domenick Tiziano, Owner & Blogger, Accidental Rental
If you converted your former residence into a rental property, you’ll need a Dwelling Fire (DP3) insurance policy to cover the property in case of fire. Don’t keep using your old homeowners policy as it may not cover the rental property. A DP3 policy will cost more but it will also cover lost rent in the event the property becomes unusable.
25. Interest on Financial Costs
Allison Bethell, Real Estate Investing Analyst & Writer, Fit Small Business
Investors often forget to incorporate interest on financing costs as one of their rental property expenses. Whether you have an interest only loan or a traditional loan, you’re paying interest, which is one of the costs of financing a property. If you have an adjustable rate mortgage, your interest rate can adjust after its initial fixed period, and this can lead to increased interest costs. It’s a good idea to calculate your interest costs prior to purchasing the property so you know what to expect.
Bottom Line – Rental Property Expenses Investors Can’t Afford to Forget
It’s important for real estate investors to accurately calculate the net income and ROI for their rental properties. As a landlord, you should be aware of the possible rental property expenses so you can factor them in when you prepare your financials. Make sure to include all the costs and expenses mentioned above to avoid miscalculating your income and maximize your potential returns.