Many may view becoming a landlord as a great way to earn passive income with ‘no work,’ yet, there are many costs associated with becoming a landlord that may not have previously been considered. Here we are laying out 7 costs you may have never considered when becoming a landlord.
1. Cleaning, Care, and Maintenance Costs
While preparing for tenants to move in, it is fairly common to spend a good chunk of time and money doing the renovation on an apartment in order to make it both appealing and safe. Once tenants move out, this process is repeated over and over for the next residents to come, meaning a landlord should be prepared to financially keep up with renovations, often out of pocket, for each tenant moving out/in.
2. Tenant Screening
When choosing new tenants, it is important to have good renters that will meet rent deadlines. It is vital that landlords conduct tenant screenings with background checks to see if there is a history of criminal activity or eviction. Each background check is roughly $40-50.
3. Increased Insurance Costs
Homeowners who decide to rent their homes instead of selling change their status from ‘primary occupant’ to ‘investor.’ When this is the case, this results in more costs to insure the home with a special landlord insurance policy. According to the Insurance Information Institute, the premium is about 25% more than with typical homeowners insurance.
4. Legal Fees, Administrative Charges, Evictions
Legal disputes happen every now and then when a tenant needs to be evicted or settle some other legal dispute related to their living situation. Landlords should be prepared to pay for legal advising through attorneys as well as budgeted money and time for getting legal advice, learning rights as a landlord, and drafting rental agreements. In the case of evictions, it costs around $50-150 to file paperwork to start the eviction process, another $50-250 for law enforcement to handle the eviction, and depending on the state the tenant leaves the property, it is entirely possible more fees will accrue such as cleaning crew, dumpster and/or contractor for repairs.
5. Increased Taxes
Many states and municipalities have tax rules that favor owners who live in their homes, such as the homestead exemption. Tax breaks do not always apply to investment properties, thus, it is likely that landlords may have a higher tax burden on their investment property, an issue that is especially relevant to those who choose to rent their primary residence. An owner will probably have to give up the homestead exemption and pay higher property taxes if they move out of a property while continuing to own it.
While it’s certainly ideal to have 100% capacity at all times, the reality is that people constantly move in and move out of different places. Vacancies can result in the landlord having to pay for their units out of pocket, thus, it is a rather common practice to include a vacancy rate in one’s business model.
7. Capital Gains
If a landlord decides to move onto different career paths and sell their property for a profit, there are taxes to pay on capital gains. Without proper planning, landlords have the potential to be held liable for those taxes.
Does any of this sound overwhelming? If so, you’ll be pleased to know that property management services are intended to take some stress off of a landlord’s hands! Here at CREC Property Management, we run background checks on tenants, undertake inspections to ensure quality is up to par, have maintenance on standby 24/7, and overall implement communication and trust. Let us take some of the work off of your hands today by choosing CREC.