BestsellerMagazine.com - CATEGORY Worldwide news: TITLE
Building wealth can be a tireless pursuit for those wanting to live out the American Dream. For many, lack of capital in the form of cash reserves and cash flow makes this task even more difficult. That’s where the appeal of becoming a landlord comes in.
With little more than a good credit score, steady income and, in some cases, a small down payment amount, a person can become a property owner. The plan sounds so simple. Purchase a property with a low monthly payment then find a renter to cover or exceed the mortgage. All the while, your equity in the property accumulates with almost no effort on your end.
Is landlording truly that effortless? What happens when there’s a repair needed? What if your property is vacant for six months or more? If your renter decides to sue you, are you able to cover legal fees or payouts?
This is when landlording becomes more complicated and more costly. Buying property and renting it out can be a smart way to build wealth. The problems come when many people enter this business without a business plan or an idea of true operating costs.
If your plan is to hack your way to wealth as a landlord, back of the napkin math won’t suffice. You’ll need to research each and every cost that could affect you as a real estate entrepreneur.
Though the costs of being a landlord will vary based on a number of factors like geography, property type and landlording arrangement, this guide will give you a number of items to research so that you can readily anticipate the not-so-obvious costs of being a landlord. It will help you make decisions when you acquire, lease and even sell your property.
At the core of your rental property business will be the viability of your renters. If you don’t have good renters, your business will fail.
Lucas Hall, property owner and founder of the website, Landlordology, says landlords should conduct tenant screening with background checks at all levels, especially county jurisdictions where evictions show up, is key. Expect to pay around $40-$50 for a credit and background check. This cost can be passed to the applicant in some cases but a landlord should be prepared to cover it if they won’t.
Lucas also suggest another step for screening, “I ask the applicant to provide two references from their last two landlords.” He then goes on to contact the references with very specific questions. He’s looking to get a sense of what it’s like to have that person as a tenant. He also wants to know the condition they leave the property in when they move.
It’s not uncommon for people to give fraudulent information when it comes to these references. They’ll pass their brother or good friend off as a former or current landlord. Lucas says lying is an absolute deal breaker, “If they’ll lie to me in a business relationship, what else would they do?”
Though you can pay a nominal fee for information from a consumer reporting agency on a potential candidate, there’s more legwork to do with screening. If you’ve got to screen multiple people to find the best renter, all this activity can add up against your time (which also comes at a cost.)
If you don’t conduct your thorough due diligence with an applicant who becomes a tenant, problems can crop up- costly ones. This can lead to evictions, vacancies and a lot of money lost.
If a tenant stops paying rent, yet remains in your property, you’ll inevitably have to begin the eviction process.
Eviction timelines and costs vary by county. Expect to pay between $50-$150 to file paperwork with the local courthouse to start the process. You’ll get a court date with your tenant that could be two, four or even eights weeks out.
If all goes well and the court awards you the right to evict your tenant, you’ve got to work with the local police or sheriff to get it done. These law enforcement professionals will charge between $50 to $250 to handle evictions.
Once a tenant leaves, the drama could continue. The place could be left dirty, full of junk or vandalized. As you can imagine, your eviction budget just got bigger with these potential expenses: cleaning crew, dumpster and/or contractor for repairs.
We’re describing a simple eviction, but keep it mind it can be much longer, complicated and costly. You may need to retain a lawyer. Perhaps you (or your counsel) makes a mistake and doesn’t comply with every statute for a compliant eviction process. This alone could add weeks or months to the timeline.
All the while, your tenant is not paying rent. Yet, you’re still responsible for paying your mortgage (plus insurance and taxes) and personal living expenses. As you can see, this all can add up very quickly.
Though you’d like to believe that your property will be rented 100% of the time, this just isn’t the case. So, you’ll want to include a vacancy rate in your business budget. Vacancy rates are statistics set at the local-market on a macro level. This rate may never actually affect your unit(s). However, you’ll still need to know this number to budget properly for expenses that come with vacancies.
You can ask other landlords and property managers in your immediate rental market to get a general idea of vacancy rates but accurate numbers are available from the U.S. Department of Housing and Urban Development (HUD) website.
For example, if we look at the HUD data on vacancy in Chattanooga, TN, we’ll see that it’s currently at 8%, meaning 8% of the region's rental housing stock is vacant. If you decide to purchase and lease a property there that rents for $800 per month, you’ll want to set aside 8%, or $64, of the rental income to cover vacancy costs.
Vacancy expenses include the mortgage you’re paying on the empty unit along with the money it costs to market the property and acquire new tenants. The range of expenses depends on the investments you’ll need to make it so your property can be rented sooner than later.
Common costs covered by your vacancy budget include:
- Professional pictures of your rental $100-$200
- Copy editing on a rental listing $25-$50
- Showings $50-$100 (each)
- Commission award for lease signing- $50-$100
Alternatively, you could hand all this over to a property manager who would typically charge you the first month’s rent plus another 10%. In this case, it would be $880.
Laws, Ordinances and Building Codes
Andrew Timms is a property owner and president of the Illinois Rental Property Owners Association (IRPOA). Andrew says that one of the biggest variables landlords forget to account for is the role of government in their business. He adds that, “Local or state entities can pass legislation and building codes that can have a direct impact on your bottom line as a landlord.”
A landlord can’t always anticipate how, when and to what extent laws will change. If there’s not much time for a landlord to be compliant with a new law, they be stuck with costs they may not be able to pass on to tenants right away. Leases are signed on a yearly basis. So it could be extremely difficult to raise rent or give or bill for expenses not stipulated in an existing lease.
Finally, you’ll want to be thoroughly knowledgeable about any rental market where you’ll own and lease property. There are some places that are particularly favorable towards tenants which could make landlording more of an expensive hassle. Local ordinances could make it easier for tenants to break a lease, withhold rent payments, draw out the eviction process or win settlements against you.
You may think that keeping your property insured, in great condition and treating tenants fairly is all it takes to avoid a lawsuit. Believe it or not, there are many situations that your landlord liability insurance won’t cover like:
- Small claims court
- Discrimination lawsuits*
- Injury of a worker on your property*
*You can ask your insurer for additional coverage as it’s not normally covered in under a standard policy.
You could inadvertently (or purposely) choose one applicant over another because one has kids or a higher income. In many places, these are both protected classes. If there’s suspicion of discrimination, you could be hit with a lawsuit. If you’re underinsured, you’ll have to come out of pocket for court fees, an attorney and any money if the suit is not settled in your favor.
In addition, there are very rigid laws, in some places, around security deposits. One misstep and you could be on the hook for double or triple the amount of the original deposit plus attorney fees and court costs if you are sued for mishandling a renter’s deposit. These cases are usually handled in small claims court and your insurance will not cover these costs either.
Otherwise known as CapEx in the rental world, capital expenditures are big ticket expenses that wouldn’t come under regular rental maintenance. Much more serious than a leaky faucet or a broken screen, these costs can make or break a property rental business.
According to landlord and founder of Spark Rental, Brian Davis, “These costs are infrequent, but inevitable and recurring. Landlords should typically budget 5-10% of rental income for CapEx.”
Expenses that come under this category include repair or replacement for things like roofs, HVAC systems, windows, septic tanks and foundations. If you’ve got an older building, you might want to budget even higher than the typical 5%-10%.
Chad Carson co-owns 90 rental units and gives advice to other landlords at CoachCarson.com. He suggests a more aggressive way of saving for these larger projects, “When you buy a property, estimate the remaining life on the big items. Divide their future cost by the time until you replace them, and then set aside money up front and each month to ensure you have cash when you need it.”
Andrew, of the IRPOA, says that he’s paid lawyers to go over his lease contracts with a fine-toothed comb. In his eyes, not being compliant could cost so much more than a few hours of his attorney's time.
Andrew points out that accounting help is also crucial. Especially as you scale your ownership over multiple units, “You should get with a CPA to discuss your tax strategy.” For example, your CPA can help you make the call for expensing or depreciating certains upgrades related to your property.
Andrew says that making these kind of decisions without professional help could be costly down the road, “You might be able to use certain costs to offset future cash flow. But you never really know until you get a custom analysis of your situation by a professional familiar with real estate tax laws.”
Don’t forget the day to day bookkeeping and billing. You may have time to handle this yourself but if you don’t, you’ll have to outsource this task to a helper. You may even need to cover the costs of accounting software if you decide spreadsheets aren’t robust enough for your real estate business needs.
If you decide to sell your property for a profit, don’t plan on walking away free and clear. There are taxes to pay on those capital gains. For example, if you purchase a property for $50,000, make $20,000 in repairs and sell the property for $100,000, there’s $30,000 in profit you’ll owe taxes on. There are ways to avoid this tax, but without proper planning, you could be held liable for those taxes.
Real estate investing has a pretty low barrier to entry and it’s become more competitive in recent years. As the head of a professional association, Andrew Timms, recognizes the value in staying abreast of new developments in the field of real estate.
Andrew says that learning more about the industry can prevent problems, “One of the best ways to avoid surprise and hidden costs is with education.” Andrew and many landlords he knows have benefited from associations, conferences and networking, “By belonging to local and state associations, I have been able to learn how to run my business and manage my property.”
In all of this, perhaps the biggest hidden cost is your time. Many newbie landlords don’t have the cashflow to engage a property manager for their first few rental units. This means that your time, energy and emotions will be fully engaged dealing with your rental business.
Lucas of Landlordology owns 5 properties in 3 states and manages them without the help of a property manager. According to Lucas, there’s just not enough room in his rental income for this. Though technology has come a long way enabling him to collect rent online and schedule maintenance and review remotely, the reality is that landlording takes up time.
But associated with your time are other hidden expenses like the mileage and wear and tear on your vehicle going to and from your unit(s) to resolve problems.
Elizabeth Colegrove, of Reluctant Landlord, owns eight units and manages four others for another family. She drives home the point about the actual time it takes to handle issues with rental properties, “As a homeowner if something breaks, typically, you will figure it out or change it out. So a $4 repair stays $4. As a landlord, those $4 breaks become $200 when you add in trip charge, time and then parts cost.”
MagnifyMoney is a price comparison and financial education website, founded by former bankers who use their knowledge of how the system works to help you save money.
BestsellerMagazine.com, index latest News this day of events, accidents, crime, law, News unique, Politics, and special reports on the world and International.
Source : http://www.khou.com/money/magnify-money/the-hidden-costs-of-being-a-landlord/484530369