4 hidden costs of being a landlord
So you would rather rent out your home than sell it. Beware: Insurance, maintenance and other costs can add up quickly.
Life as a landlord may be tempting to homeowners who can't sell their homes and to others looking to add properties to their investment portfolio.
Many costs associated with rental properties catch novice landlords by surprise, however. The following are four hidden expenses that experts say new landlords should consider.
1. Increased insurance costs
Rental homes may cost more to insure.
For example, homeowners who cannot sell their homes should know that renting out the home changes an owner's status from primary occupant to "investor," says Brian Mikelbank, an associate professor of urban studies at Cleveland State University in Cleveland.
As a result, it costs more to insure the home with a special landlord-insurance policy. According to the Insurance Information Institute, the premium is about 25% more than with typical homeowners insurance. (Bing: What does homeowners insurance cover?)
A tenant's rent payments may help cover the increased expense, but Mikelbank says landlords shouldn't always count on it.
"Homes will usually have tenants for less than 12 full months out of the year, since it takes time to find a renter, or tenants could potentially leave before their lease is up," he says.
2. Legal fees and administrative charges
Landlords should budget money and time for getting legal advice, learning their rights and drafting rental agreements, says Lisa Sevajian, a real-estate agent in North Andover, Mass.
"Some attorneys will charge a flat rate of about $200 for landlord services," Sevajian says. Other lawyers may charge by the hour.
Owners should also be prepared to pay for additional work if they must evict a tenant or if there is another legal dispute, she says.
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In addition to legal expenses, landlords must pay for administrative costs related to interviewing potential tenants, running their credit histories and checking references, Sevajian says.
Property-management companies can handle these tasks for the investor, but they typically charge about 10% of each month's rent for their services.
Many municipalities require owners to register rental homes and will send an inspector to ensure the property meets code, Mikelbank says.
If there is a defect, the owner must pay to fix the problems, he says.
Some municipalities also ask new landlords to attend daylong training classes that cover topics such as how to find good tenants, best practices in property management and how to spot and report potential illegal activity.
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Mikelbank says more cities are offering these classes because of an increase in "casual landlords" who may not understand all the legal regulations involved in owning a rental property.
Fees for these administrative services add up.
"The cost for registration, inspections and training can be a couple hundred dollars a year," Mikelbank says.
3. Cleaning, care and maintenance costs
To attract tenants, landlords may have to spend as much as $1,000 on paint, carpet and landscaping, Mikelbank says. Otherwise, it might be difficult to find a reliable tenant.
Homeowners who can't sell and decide instead to rent their home should plan to spruce up the place, just as they would before a sale.
"The same upkeep problems that could be holding a house back on the 'for sale' market could also be holding it back from the rental market," Mikelbank says. "The difference is, houses can be sold 'as is,' but a renter may not be willing to rent 'as is.'"
When a tenant does move in, the landlord may be contractually obligated to fix new maintenance problems, such as a leaky toilet, Sevajian says. Once the tenant moves out, the landlord must spend more money to clean the home for the next resident, she says.
Landlords should be prepared to pay these expenses out of pocket, Sevajian says.
"Owners can require a security deposit to help cover certain cleanup costs, but it won't pay for everything if the tenant stops paying rent early or badly trashes the house," she says.
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4. More taxes
Many states and municipalities have tax rules, such as the homestead exemption, that favor owners who live in their homes, Mikelbank says.
These tax breaks don't apply to investment property. So, new landlords should be aware that they may have a higher tax burden on their investment property.
This issue is especially relevant to homeowners who turn a primary home into a rental. Owners probably must give up the homestead exemption if they move out of a property while continuing to own it. This would mean paying more property tax.
Once the real-estate market rebounds, owners may put their home up for sale, Mikelbank says. But if owners haven't lived in the dwelling for at least two of the previous five years, they likely will lose their capital-gains tax exemption, which allows individual filers to keep $250,000 of profit from the sale tax-free.
Other expenses related to rental properties generate tax breaks for the landlord. Mikelbank urges novice property investors to talk to an experienced tax professional to understand how becoming a landlord could affect their tax situation.
When dealing with applicants to rent, a landlord should make sure to run a good background check on them. How the landlord takes care of business in the begining dictates the type of tenant you will get! pay attention to the credit, tenants with good credit have something to lose and therefore value their business dealings with landlords opposed to deadbeats who dont care what you report on their already
bad credit report. Also watch out for the bait by tenants who are willing to put up lots of money for the landlord to ignore their credit. It might be the last time you'll ever get paid for rent. One should also be careful renting to frriends and relatives and never mix business and pleasures with tenants, if the owner wants to get paid with money!
Actually snow removal and buying a trash can, unless specified as landlord responsibility in the rental contract, are obvious tenent responsibilities, especially if you are renting someones single family home. Basic rule of thumb is, if you rent someones home just ensure you do all the basic tasks you would do as a homeowner, I.e clean, vacuum, lawn care, shovel snow, dust ect. The only thinks the landlord is responsible to correct are major appliances (which were included in the contract), water, plumbing, electricity, heat, and the structure itself, (frame, roof, foundation, windows, pipes, wires, major pest control etc). Alot of renters fail to understand this.
You get a bad/professional tenant, evict them (legally) as fast as you can.
Most states mandate that on single family houses, the landlord can make the tenant pay for nearly everything.
In multi-family units, things are quite different.
Tenants have a few basic rights: A safe and habitable abode are the highest on the list.
Landlords have a few rights too, but no where near as many as the tenants do.
Basically, being a landlord is tantamount to wearing several 'hats'.
Biggest one is that of being a bill collector - for the government (taxes), and bank (mortgage if you have one), and utility companies (where the landlord pays water or other utilities).
The next biggest one is that of being a babysitter - YES! A babysitter. They have to babysit the tenants constantly.
In Ohio, the landlord can take quite a while to fix something, but generally 30 days or less.
Note: please be advised that nearly ALL governmental agencies DO NOT KNOW THE LAWS regarding Landlord-Tenant relationships.
And beware of 'professional tenants'. They can cost you a fortune.
Rule of thumb when dealing with tenants - money isn't your first priority - getting a good tenant who at least tries to pay the rent and not cause problems/damage is your goal.
Another item if interest is frequent guests - the more guests a tenant has, the greater the likelihood you are going to drive your good tenants away. Same with frequent loud parties. Same with loud stereos and 'hoopty' vehicles.
Oh, and be CERTAIN you do a criminal background check. Never rent to anyone who has a pending criminal case, or other serious problems.
While money is your primary goal, the landlord has to consider the ramifications (financially) of renting to a bad tenant. Those can cost you dearly...
PS in many states, landlords are NOT permitted to divide up any utilities amongst the tenants in a multi-family building.
So, the sneaky landlord that wants to shirk his responsibilities off on the tenants by dividing up a water bill does so illegally in most places.
Landlords - if you stopped trying to squeeze money out of tenants and just be straight up about the costs (legally), you will be far better off in the long run.
Lastly - a residential lease/rental agreement still falls under your state's contract laws as well as landlord-tenant laws. You cannot put anything into a lease that is 'unconscionable'.
It's a business! It is tough, But come-on this suposed article is just fear mongering.
Take your time, Read lots of books and do credit checks, Be Honest and Firm, and dont give in to the excuses, and if they dont pay On Time file for eviction right away- that way you can have them out fast with minimum costs.
The other costs are NOT that bad
my daughter has 2 duplexes which are rented to college students. she calls them
cash cows. is covered completely for all extra expenses by having contingency
funds for everything. plus renters pay up front for first,last, and damage
deposits and credit checks. have to do your homework if you want to rent