Not So Hidden, but Often Forgotten: The “Other” Rental Property Expenses
When purchasing a rental property, there are many factors to consider to ensure you are getting the best returns on your investment. Beyond the obvious costs of the property itself, closing costs, mortgage and insurance, there are many additional fees and costs that can surprise you if you aren’t prepared.
Some important factors to consider and keep in mind as you search for your next investment:
Renovations & Repair
Some of the best deals available can be found on properties that “just need a bit of TLC” in order to be rent-ready; however, be cautious of any price tag that looks too good to be true, and remember to include the cost of repairs and renovations to the property. Keep in mind that construction costs are not the only factor either, you will need to check that the location is zoned for your planned use, that you allocate money for any needed permits, and to factor in the amount of time needed to obtain them.
In addition to any improvements or alterations made between tenants, there will be general maintenance costs associated with your property. The details of who is responsible for which repairs should be listed clearly in your lease with the tenant; generally, as landlord, as you are responsible for the structural integrity of the property, damages (not caused by direct tenant negligence or neglect) to appliances, pest control, and any common or shared areas. The general rule of thumb is to allocate 1% of the property’s total value to maintenance. For a $500,000 home, 1% annually would approximate your yearly maintenance costs at $5,000, or around $417 monthly.
Generally utilities are an expense passed on to the tenant; however, if you are considering caring for these as part of the rental cost, don’t forget to add them to your budget.
Marketing & Screening Tenants
To notify potential renters of your property, you will need to photograph and list it as available. This will involve additional fees for a photographer, fees for the listing itself, realtor costs (if you choose to use one), and signage for the property. Once you have attracted potential renters, you’ll want to complete a background and rental history check to ensure the best fit for your property; fees for these services can be passed on to the applicant if you choose, and typically range from $15-$100 each.
Loss of Rent
Whether between renters, or because of a tenant who isn’t paying, you may be subject to a month (or potentially several if renovating or having to evict a tenant) without receiving rental income. While this is not a direct expense, the loss of income is almost certain to occur at some point, and could prove substantial if you are not prepared.
Your property’s curb appeal can have a big impact on the amount of potential tenants you are able to attract. Depending on the property type, landscaping may be an expense you are able to pass on to your tenants – many home rentals require tenants to care for the lawn themselves, for example – but in between renters and especially prior to photographing the property for listing, you will likely also incur some expense for this. If you opt to care for all landscaping yourself, remember to account not only for monthly (and/or weekly) standard maintenance, but also for seasonal and larger projects like trimming trees. Both new and established landscaping can present their own issues which you’ll want to consider and balance. Newer plants can require additional monitoring to ensure they take, and established landscaping can cause property concerns such as from vines growing on power lines and roots in underground pipes.
Along the same vein as landscaping is pest control. Both landscaping and pest control can seem like good areas to cut corners and reduce costs, and doing so in either area can end up costing much more in the long-run. Dealing with an active pest infestation can cost thousands of dollars – especially if it goes unattended and is allowed to spread to other units in your building or complex – and can usually be prevented with regular maintenance and control. Not only can pests add unexpected costs to remove an infestation, but even just having an infestation can lead to negative reviews and/or word-of-mouth about your properties, which can subsequently affect the number of qualified renters you are able to attract in the future.
According to data from homeadvisor.com, the average annual cost to maintain a pool is between $1,200 and $1,800, though some homeowners can end up spending as much as $3,000 to $5,000 yearly when including repairs and utilities.
Homeowner Association fees can vary significantly in both frequency and cost. From smaller yearly payments to large monthly fees, HOA dues will need to be factored into your budget. Sometimes these fees will cover other items already in your budget (such as lawn maintenance cared for by a condo’s HOA).
Property taxes in California are calculated based on the property’s assessed value, and the exact amounts owed will fluctuate yearly. The property’s purchase price is used to determine year one, multiplied by the county’s standard tax rate of 1% (plus any city/district/personal property tax amounts). Future years are determined by using the property’s assessed value. Proposition 13, approved in 1978, states that a property’s assessed value cannot increase more than 2% yearly, and typically the county board of assessors raises property values by this allowed amount during their reviews at the beginning of each year.
In addition to the base tax rate collected by the county, local districts and cities can have their own voter-approved taxes for special projects, called “Mello-Roos” taxes.
Personal property taxes are regulated at county level, and do not fall under Proposition 13. These taxes are imposed on personal use luxury items such as RVs, boats, and planes, as well as business items such as electronics and furniture (but not items that are in inventory for sale).
Median Annual Property Tax Payments by County:
Los Angeles $3,741
San Diego $3,672
Keeping your rental property profitable requires thorough accounting and tracking of current and future expenses. For just a small percentage of rent collected, Utopia Property Management can balance these tasks for you, and provide detailed reports to keep you informed.
For Glendale Property Management Contact Utopia Management today by calling us at (800) 294-4656 or click here to connect with us online.