Are you spending more than you expected you would on your rental property?
You’re not alone. This is common, especially among investors who are not working closely with a professional property management company.
Owning a rental property can be a lucrative investment opportunity for those looking to reap financial rewards. Renting out a property or a portfolio of properties can provide an extra source of consistent and recurring income, deliver some great tax benefits, and deliver long-term financial gains as property values appreciate.
However, while owning rental property is an enticing gain for most investors, you also have to be aware of the hidden costs that come with it.
Let’s make those unexpected costs less surprising. We’re taking a look at these unexpected expenses and providing insights into what you should know about them and how you can budget for them.
Maintenance and Repairs (Especially Deferred Maintenance)
One of the most significant hidden costs of owning a rental property is what you’ll find yourself spending on maintenance and repairs. Yes, you likely budget for the necessary routine repairs that are needed in a rental home from time to time. But, are you preparing for those emergency maintenance issues that happen unexpectedly? Are you remembering to put aside some money for preventative maintenance, which will preserve the condition and value of your investment?
Routine maintenance will include plumbing issues, electrical faults, broken appliances, walls that need paint, and doors and windows that need fixing. Rental properties require regular maintenance to keep them in top condition. A proactive approach to repairs can prevent issues from escalating and is likely to save you more in the long run.
Consider existing conditions and age when you’re deciding how much to put in a maintenance reserve. If your property is older, maintenance costs may increase substantially, especially when it comes to renovations and repairs.
Deferred maintenance is especially costly, and usually unexpected.
If you put off minor repairs, you’re going to spend more than you want to. Those minor issues that may feel like a headache need to be addressed, otherwise they’ll grow more complicated and expensive.
When a tenant reports that something is wrong, evaluate it right away. It doesn’t take long for a slow drip to become a plumbing disaster. Invest in routine inspections and service calls. Have your HVAC system checked, your roof looked at, and your windows upgraded whenever there seems to be a minor issue.
When you invest in routine and preventative maintenance, there are fewer emergencies. This means lower maintenance expenses over time.
Unexpected Vacancies and High Turnover Costs
Vacancies aren’t necessarily unexpected. You know you’re not going to have your property occupied 100 percent of the time. However, vacancies that are longer than expected are often a shock, especially financially. Turnovers can hurt too, particularly when there are a lot of repairs and upgrades needed to make the home attractive to new tenants.
A property may remain vacant for some time, resulting in a loss of rental income. You can prepare for such situations by setting aside several months of rental income to cover those costs.
Here’s what you need to know about those potentially unexpected vacancy and turnover costs.
- Vacancy Costs You May Not Be Expecting
Vacancy hurts because not only are you failing to bring in any rent, you’re still required to pay for property-related things out of your own pocket. Having an empty rental home for one week can cost you several hundred dollars. When your rental property is vacant for two weeks or more, you start thinking about the thousands of dollars you’re losing in rent.
You have to plan for this eventual expense. Even with outstanding retention and strategic marketing, your Phoenix area rental home will probably be vacant from time to time.
Unexpected vacancies that come from a lease break are especially painful and expensive. And those are never easy to plan for. You’ll have to work quickly to get a new tenant established so your rent continues to come in.
When you’re trying to lease your home but you can’t seem to attract tenants, you’re watching your cash flow and your ROI slip away. Maybe the market has shifted and there’s a lot of competition. Maybe the economy is suffering and tenants are staying in place, so there’s not a large pool of renters looking for homes.
Whatever the reason for your vacancy - it’s easy to feel blindsided when you cannot rent your home. Focus on smart marketing, making your property as attractive as possible to potential tenants, and establishing a competitive rental value that attracts qualified renters.
- Turnovers are More Expensive than Expected - Always
Turnovers at least come with some notice. Your tenants have told you they’ll be moving out, and you can quickly mobilize your vendors and cleaners to begin preparing the property for a new tenant. However, you can’t always anticipate how much you’ll spend preparing the property for a new launch onto the rental market. Things have likely changed since you last listed this home. There might be more competition.
Turnovers can cost as much as a full month of rent. If you’re doing renovations and making a lot of repairs, you’re looking at thousands of dollars in expenses.
Usually, turnover costs are a shock to a property owner. Plan on having a full month of vacancy between tenants. Even if the vacancy isn’t that long, by budgeting for that time period, you will have more flexibility when you’re making updates and upgrades.
Budgeting for Upgrades and Improvements
Property amenities and upgrades can be costly and often underestimated. Amenities such as in-unit laundry, smart home technology, and better parking can help attract renters but may also require additional expenses. Upgrades like new appliances, flooring, and cabinetry can also add to the rental property's attractiveness, but they come at a cost.
It’s often worth making the investment.
You’ll need to establish a budget so you’re not blindsided by the expense of keeping up with these improvements. You want to keep your property competitive and attractive.
Upgrades and updates are required between tenants and even during tenancies. Carpet will get worn and stained. Walls will need new paint. You may need to upgrade an appliance or install a new water heater.
You need to go a few steps further if you want to continue earning high rental values and attracting good tenants. A well-maintained home will always rent easily, but a home that’s been recently renovated and improved will bring in more money. A modern home won’t be vacant long.
You might be surprised to find that you frequently have to pay for:
- Carpet cleaning and replacement
- New paint inside and on the property exterior
- Pressure washing
- HVAC upgrades and replacements
- Appliance upgrades
Make the updates and upgrades you can with the budget you have. This will serve to earn you more money by renting out your property quickly and to a well-qualified tenant.
Eviction Costs in Phoenix and the East Valley
Terrible tenants are always an unexpected cost to owning a rental property. You’ll waste a lot of time and money chasing after late rent, trying to keep your tenants compliant with the lease agreement, and potentially cleaning up tenant damage after they’ve moved out.
Eviction should always be a last resort for you as the property owner. Even if you have a difficult tenant who is not paying rent, there may be a way to get them to move out before you have to take them to court. This will save you from the shock of what it actually costs to evict your tenant.
It doesn’t even have to be an eviction to create a sudden and expensive cost for you as a landlord. You might have a tenant who does not pay rent for two months and after all your notices and the official filing for eviction, the tenant will move out before it goes to court. That’s still a lot of rent you haven’t been able to collect, and there’s no telling what the property will look like when you get inside.
Careful tenant screening can save you from the expense of a bad tenant and a potential eviction. So can property management.
While owning a rental property can be an excellent investment opportunity, there are hidden costs that, as an investor, you must consider. Maintenance and repairs, unexpected vacancies, costly turnovers, and additional amenities and upgrades are all possible expenses for rental properties.
Spend some time budgeting before you invest and as you evaluate income and expense statements for the current properties making up your portfolio. You want to be sure you’re making wise investment decisions that provide long-term benefits. By being proactive and planning ahead, you can make rental properties a profitable part of their investment portfolio.
Don’t forget about inflation, either. That’s an unexpected cost that drives up the prices you pay for everything, including maintenance and property management and supplies and insurance.
If you’d like to talk more about how to budget for your investment properties, please don’t hesitate to contact us at TCT Property Management Services. We manage homes in the East Valley, including Mesa, Gilbert, Chandler, Scottsdale, and Phoenix.