Hidden Expenses in Rental Property Investments

If you’re already a landlord, then you may already know about these “hidden” fees, but if you are just now searching for your first investment property you’ll also want to search for where these hidden fees may come into play.

1. Insurance

Property insurance should be a no-brainer, but what about liability insurance for yourself or your LLC that holds the property? If you are managing your rental property on your own, it is important to have that extra protection for your asset, yourself, and anyone else that works for you under the LLC.

Liability insurance will cover claims involving bodily injury or property damage up to a limit. So, if your tenant damages the rental property or if someone gets hurt while leasing the property your property and your business will be protected from the expenses of out of court settlements, litigation, and judgments awarded by courts. This is particularly important when your rental property has a pool, as the rate of children drowning is twice as much as the national average here in Arizona.

2. Evictions

Not all tenants are great, and sometimes things happen where you will need to evict someone from your property. The cost of evicting tenants can cost many years’ worth of profits, and the cost doesn’t just end with the eviction itself. You could face legal expenses, repairs to your property, and you’ll also have to put some money towards advertising your rental, while not making rent with a vacant property.

There is no sure-fire way to avoid these costs from happening other than taking care to do proper screenings of potential tenants, and money saved up (approximately 6 months’ worth of rent) to cover the passivity of eviction.

3. Maintenance and Management

Even if you are planning to single-handedly maintain a property and manage it on your own, you need to be aware of the expenses that go into the work you’ll be doing.

Maintenance expenses vary from the small things like managing the yard to larger ones like replacing a roof or an AC unit. You’ll want to be prepared for the worst even when presented with the best possible outcomes by saving about 10% of rents.

Managing a property is a lot of hard work. Most property managers are compensated between 5 – 10% of rents. Think about the work that goes into managing the property, and ask yourself, is there something better you could do with your time?

What are some other hidden fees that aren’t written on the pro-forma when you buy your residential investment property? Capital Fund 1, LLC will be there for you whenever you’re ready to purchase your next property or refi your current one.