Owning a rental property isn't cheap, but you probably knew that already. Mortgage payments, taxes, insurance—it takes a lot of cash.
Fortunately, rental properties make up for their high costs with even higher (hopefully) rental income each month. Well, if everything goes right, that is.
However, there are a few expensive costs that can completely derail your earnings if left unchecked:
- Property management
You can get every step of the rental game right and still come out worse for wear if you slip up on any of these expenses. Let's make sure that doesn't happen.
With a little know-how, you can easily cut costs and boost your earnings. Below, we'll breakdown these expenses and show you simple ways you can save cash.
1. Property Management Fees
Landlords trade money for time when they opt to use a property manager. Property management companies usually demand anywhere from 8-12% of your rent (usually right around 10%), and that's just the monthly management fee—that doesn't include all the other costs:
- Initial Setup fee: Setting up your account is only a one-time cost, but it's usually a hefty one ($500 or more). This fee usually (but not always) includes a property inspection and communications to tenants letting them know the property manager will be managing the property.
- Leasing fee: Property managers often charge a tenant placement fee to make sure your property is occupied. This usually includes advertising costs, screenings, and lease agreement preparation. Property management companies don't mind so much if tenants come and go—it gives them another opportunity to charge you additional fees.
- Vacancy fee: If your property is left vacant, your property manager may charge you a vacancy fee.
- Maintenance markups: You may be required to put money into a reserve repair fund, which managers will draw from when they need to make necessary repairs. However, property managers usually markup maintenance costs, making it more expensive than if you'd found your own repairman.
- Eviction fee: Any necessary evictions will come at an extra cost.
- Early termination fee: If you terminate your property management contract before it's finished, you'll likely be charged a fee.
While property management companies can save you a boatload of time and help maintain the property, they can also quickly become one of your biggest expenses.
Consider using an alternative solution like Nomad. Nomad will guarantee your rent for 2 years—no vacancy fees, no maintenance markups, no recurring tenant placement charges, no setup fees, or any of that jazz. Just a nice, healthy paycheck in your account every month—no questions asked.
2. Vacancy Costs
Vacancy costs are the silent killer of rental properties. When landlords whip out the calculator to estimate their earnings, they often assume the property will be rented out all 12 months of the year—but that's usually not the case.
The average US vacancy rate hovers around 7%, but that number varies state to state and city to city.
When your rental sits vacant for a month, you have to eat the entire cost of that month's mortgage—plus, you still have maintenance costs, property management fees (if using), tenant placement fees, and more.
And if two months go by without filling your rental, then that cost gets multiplied.
Needless to say, vacancies are expensive. And they're not uncommon. That's why you should always plan for them in your budget.
Mitigating vacancy costs is difficult. Having an early termination fee in your leasing contract can compensate you for a short time, but you'll need to quickly find a new tenant to avoid a loss.
Partner with Nomad to maximize your rental income and lower your vacancy risks. You get paid every month, no matter what—even if your property sits vacant. Not bad, right?
3. Maintenance and Repair Expenses
Maintenance and repairs can be a real financial headache, and they fall into a variety of buckets:
- Routine maintenance: Includes cutting the grass, emptying garbage and recycling, basic landscaping, and the like.
- Seasonal maintenance: Things like snow removal, gutter cleaning, tree and bush pruning, and raking the leaves.
- Appliance maintenance: Appliances are cheaper to maintain than to replace. Stoves, ovens, washers, dryers, and HVAC systems need to be routinely serviced.
- Emergency maintenance: Heaters die, pipes burst, ACs quit—and they need to be repaired quickly (and they're not cheap).
- Capital Expenditures (CapEx): These are infrequent but massive investments in your property. Think roof jobs, appliance replacements, new driveways, flooring, and the like—expenses that all cost thousands of dollars.
Whether you DIY, hire a property manager, or use Nomad, maintenance costs are always going to eat into your earnings. You should budget at least 10% to 15% of your rental rates for maintenance and repairs—this will help you be ready for any unexpected expenses.
Invest in your property now. If you ever plan on selling your property in the future, you'll have to make sure it's in tip-top shape to earn tip-top dollar—so you'll eventually have to invest money into your property. Doing it now prevents some minor problems from becoming big problems, though—so don't wait to make necessary repairs.
4. True Value of Your Time
Perhaps the most costly expense is that of your time—the most finite resource you have. You can always make more money, but you can never make more time.
When evaluating the cost of your rental property, you'll need to factor in the value of your input:
- Hours: How many hours are you putting into managing your rental property? How much is your time worth? If you spend 3-5 hours a month on your property (with tenant relations, maintenance, collecting rent, finding new tenants, etc.)—and your time is worth $50/hr—then you could be spending $150 to $250 of your time each month.
- Opportunity costs: What could you be doing instead of managing your property? For example, if you sign a lease with Nomad, could you pick up a freelance job to fill those 3-5 hours you would have spent managing your property? In that case, you could be missing out on $150 to $250 every month.
Know What You're Spending
Explaining these expenses in greater detail isn't to deter you—far from it. By knowing what you're spending, you can make better financial decisions to earn the income you expect and live the life you want.
Try our handy-dandy Rental Income Calculator to see how Nomad can increase your earnings, lower your costs, and provide you peace of mind. You'll be surprised to discover your true rental income and expenses.