Are you thinking about purchasing a rental property and becoming a landlord? Are you thinking that this is a great way to earn some passive income? Are you ready to become a landlord for the first time ever?
Before you make any decisions. Before you jump into buying your first rental property. Before you invest your hard earned money and precious time, you need to be aware of all of the costs that are involved with being a landlord.
This post is broken down into 3 distinct sections: the money you need to spend before you get a tenant in your rental property, the costs of having a tenant in your unit, and the fees when your tenant leaves the unit.
You need to buy the property.
Before you can rent out your rental property, you need to find it first. This means that you’re going to have to put down tens of thousands of dollars for the down payment that you need to obtain this place. This also means that you’re going to have to tie up a significant piece of your capital into this venture. This in turn leads to an opportunity cost. The opportunity cost means that you might miss out on other investment opportunities with so much of your capital tied up in your rental place.
Looking for the property.
There will be a time and money investment when it comes to looking for the property. You might not find the right property for a while. This will take up time and energy. You’ll spend many hours on reviewing different locations and communications. The amount of cost involved here all depends on how you value your time.
Real estate agent fees.
If you’re working with a real estate agent you’re going to have to pay your fees. The fees here vary on the agent and the price that you guys agree on in advance.
Lawyer fees.
You need a lawyer to go through the real estate contract and for the closing. This will easily cost you about a thousand dollars. You usually don’t pay this money up until the closing date/when you get your keys.
Property closing.
You’re going to have to pay the typical property closing fees with your rental place. This is usually set at a percentage rate depending on the city that you live in and the typical closing costs. Lots of new home owners totally forget to factor this cost in.
Maintenance work.
Unfortunately, a home doesn’t always come ready to live in. The property might need to be upgraded right at the beginning or over time as tenants take their toll on the place. I bought a brand new condo and many changes had to be made. The reality is that there will always be maintenance work that you need to do on a property. If you want to rent out a basement apartment or several units, you’re going to have to make some modifications to the property to ensure that it’s up to code and has enough exits.
The home that my friend lives in his college town has a fire exit. Due to the amount of tenants living in the home, the landlord had to install and extra fire exit from the basement.
Searching for a tenant.
You need to find a tenant. Depending on the location of your property and the market, the time it takes to find a tenant will vary. I put up an ad for my condo the other day and I received three tenant inquires by the time I woke up. I was fortunate enough to come to terms with the first potential tenant that came by to check out my place. It doesn’t always work out like this. This leads into my next point…
Down time.
What will you do if you can’t find a tenant for your rental property right away? You’re going to obviously be on the hook for all of the costs. For how long can you afford to pay for all of the bills? How long of a down time before you start deeply cutting into your savings
Alright so now you have a tenant and you’re ready to start collecting your monthly passive income. What costs are involved when you’re actually renting the property out and have a steady tenant?
Mortgage payments.
Your mortgage payments will usually be your greatest expense for your rental property. This can easily cost you about $1000 per month, until you finally pay your mortgage off. The greatest chunk of rent usually covers the mortgage expenses.
Property taxes.
You need to factor in your annual property taxes into the monthly rent that you’ll be charging. Property taxes vary depending on which area of the world that you live in. Property taxes are usually 1% or so of the value of your property.
Maintenance fees.
These can completely destroy your profits. The maintenance fees at my condo are at $215 per month and this doesn’t come with any special amenities. It’s unbelievable how high these fees can be in some new condo developments. These will easily chew into your profits. The worst part is that the condo fees can increase every year.
Property damage.
If anything breaks around the house on its own, it’s usually on you to take care of the repairs. Most tenants won’t repair something that they didn’t break. The costs here can range from zero to thousands of dollars depending on what breaks.
Now you have your property and you’re making money. What if the tenant decides to not re-sign or to run out on their lease? What new costs will you be facing?
Finding a new tenant.
Now you’re going to have to go through the whole process again of finding a new tenant. If you’re working with a property management firm, you might not incur any further expenses because your monthly fees should cover you. If you’re doing everything on your own, then you’re going to have to invest your time once again by trying to find a new tenant.
Fixing up the unit.
Depending on the tenant, you might have to fix up the unit a little bit. This could be something as simple as a paint job or re-modeling the washroom. There will be costs involved in fixing the place up.
Down time.
Down time once again becomes a cost with your rental place. The truth is that down time can cost you much more than you could ever anticipate. This might also lead to desperation. When you get desperate you’re not thinking straight. You might take an unqualified tenant or try to sell your unit. Please always keep down time in mind.
We’ve gone over every single cost when it comes to managing a rental property. Now we can finally answer the fundamental question here– can you still make money with being a landlord at the end of the day?
Yes you can. If the price of monthly rent that the tenant pays you covers all of the costs involved. It’s really that simple.