When calculating the true cost of owning a car, the sticker price is only the beginning. Similarly, it is the hidden expenses of operating a rental property as a money-making venture that can make or break your success as a landlord.
When a teenager approaches a parent about acquiring their own car, they may solely consider the figure they see on a television commercial touting a reasonable-seeming lease payment. They calculate that they earn enough money at their part time job to swing it. They hear "drive your brand-new dream car for only $250 a month!"
They may be sorely disappointed when they have a sit-down with Mom and Dad who lay out the realities. Leasing means you don't own it when you're done, and that the teen would be responsible for those payments well into college. Insurance costs are significant, and in some cases, can even exceed a monthly lease payment. Gasoline, maintenance, and incidental expenses associated with car ownership all add up, and they add up fast. The bottom line, unfortunately, is far from that figure they saw on television.
So it is with earning a profit from rental properties. The costs of being a landlord go far beyond mortgage payments. When calculating potential profits, landlords should consider the following:
Attorneys' Fees/Court Costs
Not only might you incur attorneys' fees when initially setting up your business, but you may also incur substantial fees when/if you must evict a tenant. In most states, eviction is not a do-it-yourself job. It requires a lengthy court process, and you would be well-advised to hire a skilled attorney to guide you through it.
Not only should landlords consider standard business insurance, they will also require special homeowner's insurance specific to rental properties. The price of this form of homeowner's insurance can be 20% more than standard homeowner's insurance.
In the interest of protecting personal assets, most landlords wisely set themselves up as a business. The cost of incorporation varies by state. Typically, there is both a one-time fee and a yearly fee involved.
Renting property comes with a host of new taxes. Though some of your expenses may be tax-deductible, don't count on those deductions to cover the cost of, for example, capital gains. In addition, you may incur extra expenses for tax preparation, as filing can become quite complex where rental properties are concerned.
Assuming you don't encounter nightmare tenants who badly damage or destroy your property, even minimal maintenance can be pricey. Though insurance may cover some of the costs of tenant damages, you will still need to float that cost yourself if you want to get your property rented before the paperwork is complete and the reimbursement check is in the bank. In addition, when making the transition from one tenant to another, you should consider the costs of painting, re-carpeting, and deep cleaning your unit.