This Is a follow-up post to my first installment of “The Cost Of,” a blog series where I discuss what exactly it takes to start-up and venture out into specific real estate investments. The goal is to help you know exactly what you’re walking into when it comes to specific real estate investments so that you can prepare for it.
In the first installment, I covered the cost of selling your home which covered costs you’ll incur whether you’re just selling your property as an irregular activity or if you repeatedly flip houses as a business, you can find that post (HERE).
In this installment, we’ll be covering the 3 phases of the Costs Of Renting Out. Pre-renting out, renting out and post-renting costs.
Phase 1 – Pre-renting out costs:
- Personal Costs (Time).
- Setup costs (Repair and Maintenance).
- Renovation costs.
- Void period costs.
Phase 2 – Agreeing to rent out:
- Agent fees.
- Property advertising costs.
- Contractual Renovations and upgrade costs.
Phase 3 – Post-renting out costs:
- Evictions (forced and voluntary).
- Estate management fees.
When it comes to real estate as an investment, 2 of the most common means of generating income are flips and rentals.
When we talk about renting out, we are discussing a situation whereby a property owner (Landlord) temporarily allows a property renter (Tenant) use of the said property for a specific purpose in return for monthly rent payments.
Rental investments will typically come under 1 of 2 categories;
- Residential Rental Property:
Whereby the rented out property is done so to provide accommodation for the tenant, this can be through renting out of rooms, cottages, single-family homes, apartments, townhouses and so much more.
- Commercial Rental Property:
This category of rental property occurs when the tenant intends to use the property for specific profit-generating operations. These include retail, farming, industrial and recreational operations.
Both residential and commercial rental real estate typically aim for long-term tenants who are expected to stay within the property for years to come.
This blog post will be focused on the cost of small scale residential properties such as single property homes to small multi-unit townhouses.
The Costs Of Renting Out:
Phase 1 Costs – Pre-rent out (pre-market):
At this stage, as a landlord; you have just decided you would want to set up your property for renting out, the following are the initial costs you will come across.
1. Personal Costs (Time) – (variable).
Whether you find tenants with an agent or advertise alone, have a tenant in your home or entirely other property or manage your tenants through an agency or do it yourself. At some point, your time will be encroached upon.
Agencies do help lift the larger burdens of renting out such as with property inspections, almost all tenant interactions and low-mid cost tenant expenses (faulty lights, sticking doors, etc). But you must be aware that when a large or nagging issue does arise, it will fall onto you and you will have to prepared for it.
High-cost renovations and repairs or a persistent tenant will need your delicate attention to handle.
2. Setup costs (legalities) – (variable under the current state of the property).
Concerning the setup costs of a rental property, as a landlord; you need to be concerned with two factors – false advertising (implied or explicit) and the legal standard of liveability in your State.
False advertising concerning setup costs is concerned with making sure you don’t accidentally or explicitly portray your property to the public under pretense. This can be as explicit as advertising the availability of a swimming pool when there Is none on the property or as accidental as showing a borehole in a photo which would imply water but you haven’t confirmed if there is still a sufficient level of water available.
The legal standard of liveability addresses the bare minimum state a property can be in, to provide State approved accommodation. Factors to evaluate this include plumbing, building the property to code and deed specifications, availability of harmful substances such as molds.
As stated above, if you intend to rent out your property to more tenants, the legalities involved to get set approval will involve more steps than those stated in this post.
Setup costs are essentially the “cost of business” for renting out. They do not guarantee or improve success – they just ensure the avoidance of legal consequences.
3. Renovation costs – (variable under the current and desired state of the property).
This is the investment spent on making your property more appealing to potential tenants.
Remodeling a room, repairs above and beyond legal necessities, painting, and tiling the property, etc. These are all forms of home renovations that are done to improve the status of the property.
For a detailed guide on some of the best and worst profitable renovations – (CLICK HERE).
4. Void period costs – (the cost of utilities, full mortgage payments, and potential rental income).
If you’re a homeowner with and no one is at home, you have an empty house. If you’re a landlord with a house without a tenant in it; you have a void property.
From the onset, this is a cost in that for each month your property is empty for, you’re losing out on the money you would have been receiving due to rental payments.
On top of that, you are now incurring the full grunt of the expenses of the property such as the mortgage and utilities cost of the property; which would have previously either been paid in part or in full by the tenant.
Phase 2 – Agreeing to rent out (In market):
This phase begins once your property is legally applicable to be rented out in the market and you are now looking for a qualified tenant. Once you reach this stage, you will have to face the following costs:
5. Agents – (typically the price equivalent of 1 months rent).
When you can legally advertise your property for rental, one of the first decisions you’ll have to decide on is whether or not you want the assistance of an agent to advertise your property or whether you’d prefer to advertise it on your own.
Agents and agencies will overall, help in making the tenancy process go along smoother. Negotiations, the drawing up of contracts, advertising the property, double-checking legalities, confirming valuations, qualifying prospective tenants and acting as a buffer are all duties for a tenancy agent.
For finding a tenant, agents will typically be paid a fee equal to month’s rent.
Going at it alone is not necessarily a disadvantage or a guarantee that the process of finding a tenant will be more difficult; it does require more time and diligence on your part in the duties I stated an agent would do above.
6. Property advertising costs – (varying dependant on the desired mode of advertisement).
The cost of property advertising crosses over from the repairs and renovations made in phase 1. The cost of property advertising in phase 2 is rarely directly monetary and more costly concerning time and resources.
Properties for rent, like properties for sale, will most commonly be advertised on an MLS (multiple listing service) which can be a public website or traditional services like a book or newspaper service.
Most online public MLS services are free. Going with an agent and agency would allow you to advertise your property through their channels as well, at no additional cost.
Property advertising can also come in paid channels like social media ads or features in specific traditional channels.
7. Contractual Renovations and upgrade costs – (varying dependant on the desired renovations).
The renovations, repairs, and upgrades made to your property in phase 1 aren’t always what a qualified and prospective tenant wants. It’s common for qualified tenants to request specific additional inexpensive renovations – filling up holes in the walls, repainting in a specific color, fixing gutters, etc.
More often than not, the cost is something you would inevitably have to do at some point.
If a large number of qualified tenants continually insist on a specific high-cost renovation such as drilling a borehole, wanting more bedrooms or bathrooms; it is a sign that either your property is priced for the wrong demographic or that is now a modern essential addition.
Phase 3 – Post-renting out costs:
You are officially in this stage once you have a paying tenant accommodating your property. In this stage you will be dealing with the following costs:
8. Estate management – (15% – 20% of monthly rentals when done through an agency).
Once you have a tenant in your property, it is essential to manage and cultivate a respectful relationship with you the landlord and the tenant. This to ensure that the tenancy lasts its maximum natural lifespan that is not hindered by resentment and distrust.
Having an empty property is the second worst-case scenario for a landlord; you want your tenant to last as long as possible.
As a landlord, estate management takes the form in the following once a tenant is accommodated in the property:
- Repairs and renovations.
- Managing tenant concerns and grievances.
- Ensuring on-time rental payments.
- Appropriate reprimanding of the tenant.
- Appropriate evictions of tenants.
A landlord can also decide to opt for an agency to handle the majority of estate management obligations.
9. Taxation – (state dependant).
Once you begin to charge an individual for accommodation under your property, you essentially have a business and that business while running profitably; must comply with state tax laws.
Failure to comply with state tax laws could lead to very serious legal ramifications.
If you are managing your property on your own; you must learn and comply with your tenancy tax laws. If you are working with an agency it is also crucial to make sure that they are complying with State tenancy tax laws.
At the end of the day, your name is on the document and you are liable.
10. Evictions (forced and voluntary) – (ranges from a repeat of phase 1 &2 costs to phase 1 & 2 cost +).
Evictions are never a financially good situation to be in the world of rentals. That is not to say that there aren’t better and worse eviction situations as I will explain below.
There are 2 forms of evictions that you will experience as a landlord; forced evictions and voluntary evictions.
Forced eviction is an eviction that was undertaken as a result of breaches in contract from either the tenant or the landlord such as through continuous late or missed payments, not executing obligated repairs and illegal use of the property.
A voluntary eviction occurs when a party decides to conclude the contract within the legal means of the contract such as through providing appropriate notice beforehand or not renewing the contract at its natural end.
Both forms of evictions will lead to the re-incurrence of phase 1 and phase 2 costs as the property will be void once more.
A voluntary eviction is cheaper in that it gives the landlord time to prepare for such a period; the landlord when given a notice of intention to vacate the property can pre-emptively search for new tenants to reduce the duration of the property being void.
A forced eviction can become significantly more costly for the tenant. While I stated above that an empty property is the second-worst scenario for a landlord, the absolute worst-case scenario is having a bad tenant in the property.
Having to forcefully evict a tenant can result in the following:
- Lost rental payments.
- Property repair and renovation costs for damages.
- Legal costs of eviction.
- Void costs for the duration of evicting the tenant + looking for a new tenant.
As such tenant qualification is one of the most crucial aspects of successfully running a rental property.
To avoid potential mishaps with a tenant, it is important to have a clear and concise tenancy foundation. You can learn about 7 factors that affect a rental relationship (HERE).
You are now fully prepared for what to expect when you set up your rental property concerning the costs you’ll come face to face with.
Want to learn more about renting out? Why not read a top post?