Landlords looking to get out of the game have made up a large portion of investment transactions over the past few years. Whether they became landlords out of necessity or identified a property with potential, their expectations may not currently be in line with reality. The volatility of the market in past years has essentially changed the way investing should happen. It is not uncommon for expenses to exceed the properties cash flow and cause landlords to lose money. After a few months, they start looking for a way out and will take any reasonable offer to do so, even if it means taking a loss. Before you get into any rental property, you need to know any and all expenses you will be incurring. If you don’t, it is just a matter of time before you start looking for a way out. Understanding rental property expenses is absolutely critical to realizing success.
Everyone that has owned a home, or even thought about it, can probably identify the major expenses: mortgage, taxes and insurance. These are not usually the expenses that get landlords and property owners in trouble. It is the smaller ones that, compounded with a handful of others, can quickly add up. Before you look at any property, you need to compile a checklist of all expenses, and potential ones, that you may encounter. It is not enough to simply estimate these numbers or assume they will stay the same. You need to make phone calls to local realtors, ask questions to existing tenants and reach out to property managers to confirm your numbers. Anyone can plug information in that makes the deal appear more attractive, but if the numbers are not accurate or omitted, you will have a lemon of a property.
As a landlord, a lot more money can go into your expenses than your monthly payment. Most landlords do not feel comfortable adding the utility bill into the payment for fear that the tenant will take it for granted, but there are other bills associated with the property. Start with the water/sewer bill. By itself, it is a relatively small bill. However, if there is a running toilet or a unidentified leak, it could be two or three times the normal cost. There can also be issues with cracked sewer pipes or other minor issues that can become costly if not monitored. Some municipalities will charge for weekly trash and recycle removal. Some tenants will look to see if this is added into the rent or an additional charge. If you keep adding these small charges to the rent, your tenants may start to look elsewhere. On the other hand, if you opt to cover them, you need to account for them in your bottom line.
Owning a rental property is accompanied by several unexpected expenses as well: lawn care and snow removal are just a few. Regardless of where your property is located, you will have to deal with at least one of these issues. If you live if the Northeast or other areas with winter weather, you will have to deal with both of them. If cutting the grass costs $25 every ten days, you are looking at roughly $75 a month that needs to be accounted for. You can always do it yourself, but this would cost you time and the ability to either store the mower on site or have a truck to transport it. Snow removal can be an expensive proposition if you have a rough season. Unlike cutting the grass, where you can wait an extra day or two, snow needs to be removed quickly after a storm hits. This can cost $30-$50 each storm, depending on the size of the driveway and the amount of snow. A busy winter could have a dozen or more storms that require snow removal, which, if unaccounted for, can wipe away any positive cash flow.
In addition to these monthly expenses, there are also bigger expenses that can pop up at any time. Any good landlord will have reserves to brace for the unexpected broken dishwasher, clogged toilet or busted screen door. These expenses are rather minor in nature. Big ticket items, however, may be needed at some point. A portion of the rent received must be allocated to your reserve fund every month in the event that something unexpected pops up. You also never know when your tenant will stop paying their rent. If you do not have enough to cover any of these items, you may be forced to take out a loan or use credit cards to get you through. Instead of using reserves, you have now added debt on the property, which will further impact your cash flow.
You need to take all of the expenses, current and projected, and evaluate the property. Not every property will be as good as it appears on paper. Once all of the correct numbers are plugged in, things can look significantly different. If you have all of the expenses accounted for, and like what you see, chances are you will have a property that can generate cash and long term wealth. If not, you may end up with a property that forces you to lose money. So do yourself a favor and check the numbers before you move forward. It is only after you have this information that you can properly evaluate the property.