If renting property were so easy everyone would do it, right. Maybe. Besides the knowledge and experience you need to have, there is also the investment required. But for today we’re going to assume cost isn’t the issue and look at one of the top rental property investment mistakes that people make.
If you look at a list of mistakes that can and are made, there are many to choose from. Some potential mistakes include not having adequate cash flow to cover unexpected costs, over-pricing or under-pricing your property, not understanding how to find new occupants, not knowing how to pre-screen tenants and of course choosing the right investment property. But the mistake we’re focussed on today is not properly understanding and planning for the costs of owning a rental property.
Rental Property Investment Mistakes
Fixed Based Property Rental Costs
- Mortgage Costs: Mortgage costs are not an issue. Once you purchase the property your mortgage rate is locked in.
- Insurance and Taxes: Insurance and taxes are two costs that are often rolled into a final monthly mortgage price. Unlike the mortgage component, taxes and insurance costs typically go up over time.
- HOA Fees: If your rental property is in a neighborhood with a home owners association you will be responsible for the monthly, quarterly or annual costs. Typically HOA fees go up over time. You may also encounter special assessments in their are unexpected improvements needed that have the cost spread out over all members of the neighborhood. You also need to be clear in your contract that the tenants will be responsible for any HOA fines, as the HOA will fine you as the owner.
- Garbage: You should factor in monthly garbage service costs which may also include recycling.
- Utilities: Utility costs for electricity, gas, water and sewerage are dependent upon the amount of usage. Some rental properties include some or all of these costs in the rental price, but you are better off having the tenant be responsible for these costs. You can typically expect that utility costs will run 2-3 times more expensive if you pay them verses if the tenant is responsible for them.
- Vacancy: At some point your rental property will be vacant and you will not receive a rental fee. It’s a good idea to understand what local vacancy rates are so you can budget vacancy into your rental projections. For every month that your property is vacant you lose 8.3% (1/12) of you annual rental fees. It makes sense to account for this in monthly expenses so that if your rent is $1,000 a month then you would factor 1,000/12 = $83.33 per month.
- Maintenance and Repairs: If you've owned a home you know that homes require maintenance and at times repairs. Rental properties are no different. In fact they may be a little more needy as the tenant in your home doesn't have the same incentive to to treat the home the same as you would your home. Over time you will be able to get a better idea on your costs but starting out you should budget between 1 - 2%.
- Capital Improvements: While maintenance and repairs really focus on small items like yard service or appliance repair, capital improvements cover more expensive long term items that improve the property. A good comparison is a roof replacement verses a roof repair. The replacement actually improves the value of the home while the repair helps preserve the home value.
- Turn Over: At some point you will have a tenant move out and need to find a new tenant. Before you market the property you will likely need to make minor updates, repairs, or cosmetic improvements. These type of items include repainting, repairing minor hoes or damage, maybe updating some fixtures. Items that you do here really depend upon your property and what is needed to help drive the highest rent possible. Typically you can budget $1,000 to cover turn-over costs.
Of the top rental property investment mistakes, not having a handle on the costs listed above is critical. And while these may be most frequent costs you will encounter, their may still be additional costs. You need to make sure you do you due diligence to determine if there are any additional costs or fees required by law or by a HOA agreement. Only once you have factored in all of your expected costs and you expected rental rate will you know if you have a cash-positive rental property, and in our thoughts a good investment.
GSPM assists property owners and investors in maximizing revenue potential while minimizing the hassles in marketing and managing their properties. We recognize that there are a lot of factors that go into making a property a successful investment and put our experience and knowledge to work for you. Call us at 404-254-4502 or complete our Fast Form below to learn more about our services.