When owning a rental property, understanding every financial aspect of it is crucial for successful returns. However, it is not unusual for the costs to extend beyond the initial purchase price, and it's these additional expenses that can catch you off guard.
In this blog, we will discuss 29 unavoidable costs associated with owning rental properties. From initial purchasing costs to ongoing expenses and unexpected costs, we aim to provide a detailed insight that will prepare you for the financial obligations of being a property landlord.
Knowing these common rental property expenses will not only save you from surprises but also ensure you have a realistic expectation of your potential return on investment.
This rental expenses list covers the money you spent while purchasing the real estate property.
Property acquisition costs refer to the initial capital investment required to purchase a rental property. This rental property costs include the listed price of the real estate itself, but it goes beyond just the sales price.
Acquisition costs may also involve expenditures associated with researching the property, its history, and its location. This can include anything from local property records searches to getting professional advice about potential investments.
If the real estate property is in a different geographical location, costs such as travel expenses to visit and assess the property could also come into play. In essence, property acquisition expenses represent the initial financial commitment required to secure the property. The mortgage interest for your mortgage payment can also be included in this cost.
Closing costs are the various fees associated with finalizing a real estate transaction. These fees cover a range of services that must be performed during the investment real estate purchase process.
Moreover, closing costs often include fees for things like title search and insurance, which ensures that the real estate property has a clean title free from claims or liens.
Another significant component of closing costs is loan-related fees. These can include origination fees charged by the lender to process the loan, pre-paid interest on the mortgage, and potentially appraisal fees if it was not paid upfront.
Closing costs also often include recording fees, which are charges for legally recording the new deed, and transfer taxes, which are required by some local and state governments. The specific components and their amounts can vary greatly depending on the location of the real estate property and the lender's requirements.
Property evaluation costs are typically associated with the appraisal process. An appraisal is an unbiased professional opinion of a property's value and is used by lenders to determine how much they are willing to lend for a property. The appraiser's fee is typically part of the closing costs, but it can sometimes be required to be paid upfront.
The costs can vary depending on the complexity of the appraisal, but they typically range from a few hundred dollars to over a thousand. This cost is crucial as it provides a reliable estimate of the property's value and helps ensure that the investor doesn't overpay.
The purpose of property inspection is to uncover any existing issues or potential problems with the property that the property owners may or may not have disclosed. This could include anything from faulty wiring to a leaking roof, or from a cracked foundation to inefficient insulation.
The cost of a property inspection can vary based on the property's size and location, but it's an investment that can save you a significant amount in future repair costs. It also provides a basis for negotiation, as any issues uncovered during the inspection can be used to renegotiate the purchase price or to ask the seller to complete repairs before closing.
Commission for real estate brokers represents the compensation for the services provided by real estate professionals in facilitating the purchase of the property. The commission is typically a percentage of the property's sale price and is usually split between the buyer's agent and the seller's agent.
In many cases, the seller pays the commission, but it's technically part of the negotiation and could impact the final sales price. While the percentage can vary, it's typically around 5 to 6% of the property's sales price.
The following operating expenses are the ongoing costs of owning a rental property. You can expect to pay for this monthly, annually, or as needs arise.
If a rental property were financed through a mortgage, monthly payments would become a primary recurring expense. These payments include both the principal and the mortgage interest.
Depending on the type of loan, it might also include components like homeowner's insurance and investment property taxes. The exact amount will depend on the loan's size, mortgage interest rate, term length, and the property's value.
Property taxes are collected by local governments based on the assessed value of the property. The tax rate can vary significantly depending on the location.
Property taxes are a significant recurring cost and must be paid yearly or semi-annually, though they're often broken down into monthly payments if included in a mortgage escrow account.
Marketing costs are associated with attracting tenants to the rental property. These could include listing services, signage, online advertising, printed materials, and more.
These costs can vary depending on the marketing methods used, the rental market's competitiveness, and how often the investment property turns over tenants. If you are also using a real estate lead management software, this could add up to the cost of your investment properties.
If a property manager is employed, their fees are a regular expense for rental property owners. Investment property managers or property management companies handle the day-to-day operations of the rental property, including collecting rent, handling maintenance and repairs, responding to tenant inquiries, and dealing with vacancies and tenant turnover.
Typically, property manager fees or fees for property management companies are a deductible expense from the monthly rent given to the rental property owner, often around 8 to 12%.
Routine maintenance and repairs are a necessary part of owning not just a personal property but also a rental property business.
These can include anything from routine tasks like landscaping and gutter cleaning to more substantial repairs like fixing a leaky roof or replacing a broken appliance. The exact cost can vary widely depending on the property's age and condition. But they are most probably deducted from your rental property income.
Improvements and upgrades to the personal property being rented, while not mandatory, can help attract and retain tenants, allowing for higher rents and a better rental property portfolio for most rental property investors.
These could include cosmetic updates like painting and new flooring, functional improvements like new appliances or upgraded fixtures, or major renovations like a kitchen or bathroom remodel.
Proper financial accounting is crucial for rental properties, both for tax purposes and for tracking profitability. This can involve the cost of accounting software or the fees for a professional accountant. The complexity of the property's finances will dictate this cost.
Managing a rental property can be time-consuming, and this "time cost" is an indirect expense. From dealing with tenants and arranging for maintenance to handling paperwork and financial tracking, the hours can add up.
For some landlords, particularly those with multiple properties or other jobs, this may also lead to tangible costs like hiring additional help or losing out on other business or employment opportunities.
Conducting background checks on potential tenants is a best practice for landlords. These checks can verify a tenant's income, rental history, credit history, and criminal record.
The cost of these checks is usually shouldered by the landlord, though some pass it onto the applicant.
Depending on the location and type of property, pest control can be a significant expense for rental property owners. Whether it's regular preventative treatment or dealing with an infestation, pest control services are usually a landlord's responsibility.
The net rental income is generally considered taxable income. The specifics can vary widely depending on the owner's overall financial situation, local tax laws, and what actual expenses can be deducted, but residential rental property investors should expect to pay income tax on the profits from their rental property.
Landlord insurance is meant to protect investments. This usually includes at least liability coverage and property damage coverage. The cost of insurance premiums can depend on the property's value, location, and other factors.
Depending on local laws and regulations, landlords may need to obtain and renew business permits or licenses. The cost of these permits can vary.
Similar to the fees for financial accounting, additional accounting costs might arise from specific tasks like preparing year-end tax returns or handling an audit for your rental income. Accountants can also do profit and loss statement if you need one for your rental business. Of course, a tax professional fees can also be included in this if you employed one.
If utilities are included in the rent, or if the property is vacant, the landlord will be responsible for these costs that can be deducted from the rental income. This can include water, electricity, gas, trash collection, and potentially even internet service.
If the property is part of a homeowners' association (HOA), the landlord will usually be responsible for the HOA dues. These fees contribute to the maintenance and repair of common areas and amenities.
Over time, physical assets like the property structure and appliances will depreciate. While this is often considered more of an accounting business expense than a cash rental expense, it can represent the future costs of replacing aging assets.
If a landlord or real estate investor uses a leasing agent or on site leasing manager to find and screen tenants for their rental business, they'll need to pay a commission. This is often a percentage of the first year's rent.
Most real estate investors and landlords are responsible for ensuring their rental business complies with all local codes and regulations. This can involve costs for inspections, updates or repairs to meet compliance, and potential fines for any violations.
Part of owning a rental property is dealing with unforeseen situations that require a significant amount of money that will be deducted from the rental income. Check out the possible unforeseen expenses below.
The risk of vacancy is a significant concern for any rental property real estate investor. Vacancies represent periods where the rental property is unoccupied and no gross income is being generated, creating a direct hit on the return on investment.
Losses during these periods aren't merely the absence of income - they also include the ongoing costs associated with the property, such as mortgage payments, rental property taxes, utilities, and maintenance costs, which must be covered by the landlord or real estate investor.
Furthermore, vacant properties often require additional expenses to re-attract tenants. These can include advertising costs, agent fees, and potentially even renovation costs to make the rental property more appealing.
In addition, extended vacancies can sometimes lead to a higher risk of vandalism or rental property damage, which would bring additional repair costs.
Emergency repair expenses relate to unexpected issues that require immediate attention and resolution. These could be anything from a broken heating system in the middle of winter, to a burst water pipe causing water damage, to a gas leak that poses a safety risk.
Emergency repairs are not only typically more expensive due to the urgency and potential for overtime or after-hours charges, but they are also unavoidable to maintain the property's safety and habitability.
Rental property restoration costs refer to expenses incurred to restore the property to a rentable condition after a tenant moves out. These costs typically involve cleaning, painting, and carrying out minor repairs.
These costs can vary significantly depending on the property's size, the level of wear and tear, and how well the previous tenant took care of the rental property.
Managing troublesome tenants can bring a host of unexpected costs. If a tenant fails to pay rent or violates the terms of the lease, the landlord may have to go through the eviction process.
Eviction can be a lengthy and expensive process, involving court costs, potential attorney fees, and the loss of rental income during the proceedings.
Troublesome tenants may also cause rental property damage beyond the usual wear and tear. This could include anything from damaged floors and walls to broken appliances or fixtures.
These damages often require repairs or replacements, adding to the property owner's costs. Again, the cost can vary greatly depending on the extent of the damage and the specific items affected.
Legal consultation fees can arise in a variety of situations when owning a rental property. Landlords may need legal advice when drafting or revising lease agreements, dealing with complicated eviction proceedings, or navigating local rental laws and regulations.
Legal fees can also be incurred if a landlord must defend against a lawsuit - for instance, if a tenant sues for injury occurring on the rental property.
The cost of legal consultation can vary widely depending on the complexity of the issue and the specific rates of the attorney or legal service used.
Owning a rental property will always come with some expenses, but there are a few ways to lessen and manage them. Some of these strategies are listed below!
Tax benefits and the potential for steady income make rental real estate an attractive investment option. As a real estate investor, one of the significant advantages is rental property tax deductions. These deductions allow you to subtract certain income and expenses from your taxable income, potentially saving thousands of dollars.
When you own a rental property, you have to report rental income to the Internal Revenue Service (IRS). However, tax deductions make this process less daunting. Rental property tax deductions cover a broad range of deductible expenses. For instance, you can write off property tax payments, a portion of your mortgage interest, and even certain travel expenses incurred for the management of your property.
As a real estate investor, you are also considered a cash basis taxpayer. This means you report income in the year you receive it and deduct expenses in the year you pay them. Keep in mind that not all rental property expenses are tax deductible, and this is where understanding what constitutes a deductible expense becomes crucial.
According to the IRS, a deductible expense for rental property includes mortgage interest, property tax, operating expenses, depreciation, and repairs. It's important to distinguish that personal expenses are not deductible. For instance, if your tenant pays for a repair that is deemed to be a personal expense, you cannot claim it as a tax deductible.
An often-overlooked rental property tax deduction is credit card interest. If you used your credit card for rental property expenses, the interest is considered a deductible expense. This could potentially lead to significant tax savings.
Another key tax deduction to consider is the pass-through tax deduction, applicable to owners of pass-through businesses, which rental properties are typically classified as. This provision allows owners or real estate investors a tax deductible of up to 20% of their qualified business income or tax return.
However, the landscape of rental property tax deductions can be complicated. Misunderstanding or overlooking key aspects can lead to missed deductions and potential conflicts with the IRS. It is therefore advisable to consult with a tax professional who can ensure that all deductible expenses are properly accounted for on your tax return from the Internal Revenue Service.
Property tax is one of the largest deductible expenses for landlords. But be careful to only deduct the amount that you actually paid in a given tax year for your income and expenses. You must report this expense accurately to the IRS or Internal Revenue Service in order to gain the maximum benefit from your rental property deductions.
Furthermore, rental property owners can benefit from the depreciation deduction. This allows investors to write off the cost of the property over its useful life, as determined by the IRS. This often-overlooked deduction can provide substantial tax benefits.
Rental property tax deductions can provide a substantial financial benefit to real estate investors. Understanding the intricacies of tax deductible expenses, income and expenses reporting, and seeking advice from a tax professional are all key to maximizing your rental property expense deductions.
Whether it's property tax for the rental real estate, the pass-through tax deduction, or the depreciation deduction, each offers a unique opportunity to reduce your tax burden and increase your return on investment.
Investing in rental properties, while a source of high income, comes with an array of unavoidable costs. The 29 rental property expenses we've highlighted, ranging from initial purchase fees to ongoing costs and unexpected expenditures, play a significant role in determining the profitability of your investment.
It's crucial that you understand and account for these costs when calculating potential returns. By doing so, you can make more informed decisions for your business.
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