12 “Hidden” Real Estate Expenses That Blindside Investors

by | BiggerPockets.com

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If you are like many people, you may be investing in a buy and hold rental that you can use for passive income in your later years — or even in your earlier years. You look at the monthly mortgage payments, look at the common expenses, and decide it is a “go.” But did you remember to include these hidden expenses before you started spending all that extra money you will have?

There are the common expenses that most people know about and can plan for… and there are expenses that you will have that will reduce your cash flow significantly. If all you have is the rental income — and no “real” job — you could be a former landlord soon if you do not take them into account.

I am not listing property taxes, property insurance, utilities (water, gas electric), HOA dues, snow removal, lawn care, etc. Those are generally obvious and often stated on some cap rate statement (that generally shows a higher cap rate than actual).

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The Big 3 “Hidden” Expenses

Maintenance Expenses

The doomed landlord (or real estate agent) puts a number like $600 a year for maintenance on their cash flow statement for a rental that is renting for $1,000 a month. You can believe that number, or you can be assured that maintenance will run at least 10% of the rents. In older buildings, or a building where the owner has only spent $600 a year, it may run as high as 20% until you get the maintenance under control. Never assume anything but a number of 10% or more.

Related: How to Accurately Estimate Expenses on a Rental Property in 3 Easy Steps

Management Expenses

A typical property manager will charge between 8% and 10% of rents to manage a property. In a larger multifamily apartment situation, it may be as low as 4%. All properties MUST be managed, whether by yourself or others. If you think you will manage your own property for free, please contact me directly, as I have many places that you can also manage for free. You must be compensated for your risk and your time. Always assume a number of 10% for a single family home.

Vacancy Expense

Everyone will have a vacancy at some point. If you have a single family home, you may be 100% full — or 100% vacant. I use a number like 5% to account for vacancy. It will cover periods between renters. If you are only vacant for two or three months, just once every five years, you will have used up this expense allocation. Use 5% unless you know it will be more. Never use less.

9 Other Hidden Expenses That You Might Forget

There are also some less common expenses that you may not factor into the cost of a Rental Profit and Loss Statement, but that are most definitely part of the business of real estate, even in a one-unit rental. If you only have $100 a month in cash flow, you will quickly eat that up. I am not going to talk about tax deductions, only the actual expenses. A tax deduction doesn’t help much when you have a negative cash flow and are losing money.

All these expenses are real and must be paid.

Permits and Fees

Many cities are jumping on the rental license bandwagon. It’s a quick way for them to get an extra $50+ — and often more. In some of my rentals, the license is $50 a year, and they require an inspection every three years.  That means over $100 a year to get a rental license. In Minneapolis, MN, it costs $7,000 a year for a vacant building permit, so if you bought a rehab there, it could get very expensive.

Tenant Screening Charges

If you are procuring tenants, you better be factoring in the cost of screening them. With a typical charge being $40 for each adult, each rental turn could be an extra $80+. Some landlords, such as me, pass these charges on to the incoming tenant. But sometimes I waive the fee as an incentive to get a tenant.

If you are using a property manager, plan on giving up a month’s worth of rent (or your first born) to them when the tenant moves in. And a bunch more along the way…


Many forms of advertising are free, but you may want to put an ad in a paid format, especially when times are slow. If you have multifamily properties and generally always have something vacant or coming vacant, you will likely have a full-time ad generating prospects.


You will never expect that eviction expenses are to be included in any pro-forma statement when you are buying a property. If you do not screen well or neglect to put aside some money to evict, you will be a former landlord very soon. The cost of a bad tenant or an eviction can wipe out several years of profits.

If you are buying a property with tenants included, know that one or more of these tenants might be your first time experiencing the cost of an eviction. Assume that it takes at least five months’ worth of rent to cover the cost of an eviction, factoring in the extra legal expenses, repairs, vacancy, lost rent and advertising. Your headaches are free.

Be sure to have the capital necessary to do what it takes to recover from a bad tenant.


You will likely be driving to and from your property. You will be driving to and from the home improvement store. You will be driving to show properties, sign leases, pick up keys, clean common areas, empty coin-op laundry machines, and answer maintenance calls. I drive quite a few miles, making multiple trips, every month. This is another expense that will eat into your $100 a month cash flow. Never underestimate the ability for this expense to add up quickly.


If you are planning on doing your own maintenance, you better have some decent tools. Any job is easier with solid, quality tools that are meant for the task. A simple thing, like a GFI tester, will be able to test an outlet in seconds. A multi-meter will take longer to do the same task. Without the right tools, your first maintenance job on your property will cost a lot more than just the $5 part.


Banking Charges

Banks like to charge fees to businesses. They give away the farm to individuals, but they like to gouge businesses. While a bank charge might not break your budget, it is an expense that needs to be paid. Account fees, check printing fees, bounced check fees, and cash deposit fees are all ways to reduce your profits. My account is free, but not all banks offer free accounts.

Office Expenses

When you have a rental, you need a solid computer to run your company. You will also need a decent printer.  You will need to print leases, notices, and all sorts of letters. I use a Xerox Phaser 6280 color laser printer, and when cartridges need to be replaced, it is expensive. You will have to buy paper, envelopes, labels and stamps. You may need a cell phone, a scanner, a file cabinet and software such as Microsoft Office with Word and Excel, Quicken, and TurboTax (to learn more about TurboTax, click here); all of these are my favorites.

Related: Don’t Forget To Budget For These 3 Overlooked Expenses

At some point, you might need to incorporate. All my rentals are in their own LLCs. You may need an accountant for tax advice or tax preparation. Each LLC will need its own set up and tax forms.


You know about property insurance, but what about liability insurance for your business? If you create a property management company to run your rentals and provide an extra layer of protection for your assets, a business liability insurance policy might be a great investment. Another insurance policy you might want is a business umbrella policy.


If you are basing your financial independence on a few rentals that bring in $100 a month each, unless you have counted on these potential extra expenses, you must be prepared to work just a bit longer in your pursuits of leaving your full time job. These costs are all part of doing business, and if you only have $100 of cash flow, they will eat into your profits quickly.

[Editor’s Note: We are republishing this article to benefit landlords newer to BiggerPockets.]

What other rental or business expenses have you been surprised with?

Leave a comment, and let’s discuss!

About Author

Eric D.

Eric is a 55 year old, soon to be former, computer professional. He started several years ago to replace his “work income”, with other alternate streams. He is well on his way to retirement at age 56, and is currently making more money at extracurricular activities, than he is working at his full time job. Whether that is Financially Independent, or just old fashioned entrepreneurial spirit, is in the eyes of the beholder.


    • Thank you for the question, but I am not 100% sure what you are asking.

      With the new tax rule, anything that costs $500 or more, should be capitalized. I use a lower threshold generally. Flooring such as carpet and laminate are definitely capitalized. That means you spend $1500 on carpet, but can only write off $300 this year. It certainly does not help cash flow for this year.

      • Daniel Ryu

        Thanks for the response. Sorry for the confusion ^^

        I was wondering how much you budgeted or put aside each year (or monthly) for future Capital Expenditures – ie. Replacing roofs, HVAC systems, etc.

        Like 10% for maintenance or 5% for vacancy, I was wondering if you had a % for future replacement of big ticket items.


      • Thank you for clarifying.

        I budget 10% for maintenance. Generally my actual maintenance is a bit lower as I do much of it myself. The 10% would also include my cap-ex expenses.

        I do not have a separate account for this money, as I cash flow enough that I could generally pay for most cap-ex items without tapping a savings account. Also, I have enough capital to draw from if I need it.

        So, I project revenue and profits, but do not ‘set aside’ any money, other than my own investment accounts (much of which came from rental income). I have a HELOC I can tap also, if I have to.

        • Are these percentages taken from your gross income from the property or from your profit? I know it’s a dumb question but if your gross income is in the thousands but your profit is a few hundred a month, the difference would be huge. Thank you! Awesome post by the way.

        • Eric D.

          10% of gross rents. Assume $1200 a year for maintenance on a $1,000 a month property. That includes HVAC, roofs, and turnovers. If you can do it for less, especially in a single family, I would be surprised.

      • The new IRS rule that says something to the effect of “Starting in 2014, providers can avoid depreciating items costing $500 or less. Instead, they may deduct them in one year.”

        Fixed asset definition: A fixed asset is defined as a unit of property that: (1) has an economic useful life that extends beyond 12 months; and (2) was acquired or produced for a cost greater than $500. Fixed assets must be capitalized and depreciated for book and tax purposes.

  1. Denise Evans

    Excellent article, and very thorough. I have only one suggested addition–Accounting and Legal. Landlords will need legal advice or forms for more than evictions. The accountant should be an advisor, not just a tax preparation professional. In my experience, these professionals will more than pay for themselves if used properly, for proactive advice. But, the dollars going out the door are hard dollars, while the problems avoided are all “soft” and not readily quantified into dollars. For that reason, many people avoid seeking legal and accounting advice. If it is in the budget, they would be more likely to take advantage of those opportunities.

    • Great point. I did mention in the heading office expenses a bit. If all an account ant is doing is tax prep, you can use TurboTax. The advice thing is spot on. You need someone who knows investment property, and can advise you on what deductions are good, and more importantly what deductions are bad.

    • Jared Garfield

      Denise, excellent feedback! I was reading your profile about forming a state-wide investors association, as well as your extensive background which is impressive. I was going to send you a connection request and see if we could talk more and network, but people on Bigger Pockets seem to be reticent at times on accepting connection requests, so I thought I’d reach out to you on one of your posts and you can then give me permission to connect? I don’t live in Alabama, (I’m in GA) but we buy 30-35 homes per month there and so I’m very interested in lobbying and being involved as much as I can? One Broker/Investor to another, perhaps we can help each other network?

      • Thank you for reading!

        Great advice on legal and tax expenses. I meet with an accountant every year and pay an hourly rate, although I do my own taxes in TurboTax. I also take an 8 hour tax class each year that focuses on tax benefits for the self-employed. I read a lot and ask questions too. It is definitely an expense.

        I use an S-Corp as I already had one set up. There are advantages to an S-Corp, especially if you need to issue a W2 to a family member. I also use LLCs for my individual properties, taxed as a corporation.

        I use Quicken, not Quickbooks. It’s a lot easier. I took a lot (for me) of accounting classes in high school, undergrad and graduate school, so I think that helps.

  2. Adam Schneider

    Well written article, Eric. One reminder is fixed vs. variable expenses when running numbers. If property A rents for $600/month and property B rents for $1200/month, the you still only need one printer for the business! If you are just getting into the business, all of those one-time expenses will make it look like no deal will ever work. You have to separate the fixed and variable expenses and play out different scenarios.

    Another cost I factor is marketing to existing tenant. If you want to minimize vacancies, invest in maintaining your tenant. Provide incentives for positive behaviors. If the tenant pays on time for 12 straight months, provide a complimentary one-time professional cleaning service or some other benefit. Add that cost into your spreadsheet!


    • Great points. As you get larger, some of the costs get distributed among all your properties. It does illustrate the point to the expense of a rental, and the expense of starting a business. If you do not have the revenue to cover your expenses, it is a non-starter.

      I see far too many people ask me “is this a deal”, and the property does not cash flow – even without all of the “Big Three”.

  3. Jerry W.

    Eric, thanks for the article. Another point, since you have a separate LLC for each property is annual filing fees, separate tax preparation for each LLC, the time spent doing annual minutes, separate bank accounts balancing, as well as separate corporate books, seals, and letterhead. I also have special costs in some properties not common to all properties like sump pumps. Those only last 2 years and if you forget to check one you can have flooding. Its a good $100 to replace a sump pump.

    • Great comment!

      I only have one set of letterhead. And one bank account. I have another S-Corp that does all the property management. All the LLCs do is own the property. TurboTax does a great job on the taxes. And Quicken on the bookkeeping.

  4. Casey Murray

    Great article, Eric. A great way to make sure you don’t exclude these expenses a second time is to run through your prior year financials at look at each expense account. You’ll be amazed at the one-time expenses which are not being assumed in your budget.

    @Denise Evans – great point on the tax accountant. With the ability of taking advantage of accelerated depreciation and amortization on fixed assets, a landlord can increase their tax refund/lower their tax liability (subject to the taxpayer’s adjusted gross income levels).

    • Thank you for the comment!

      Once you have a year in the property, you know much of the expenses. Rookies getting into it often think “$100 a month cash flow and I will have a paid off property when I retire”.

      Good luck with that…

  5. Angel Rosado

    This is a great article. As a future investor, this is a great place to start thinking of all the expenses that I may incur. It’s easy to be idealistic and think you’ll have great cash flow from day one but as clearly depicted in this article that normally doesn’t happen.

    Never even considered banking fees!

    It does make the dream of becoming an investor seem like more like a dream but I’m not giving up.

    • Thank you for the comment!

      If you buy right, you will cash flow from day one. And if you buy really right, you will cash flow a large amount.

      Just wait and be patient. Jump in too fast and you will lose money.

      • It really depends…

        I analyzed 100s of properties on the MLS and Loopnet before I bought. I even passed on a property that a friend of mine purchased. I am glad I did not get that one. I made several offers that were not accepted. I had multiple offers out at the same time.

        Never ‘jump in’. Analyze, stalk, wait for a deal, and pounce when you see one. Full price MLS retail deals are a dime a dozen.

        Look for properties that are bank owned, or have a lot of time on the market. Make an offer based on your numbers, not the sellers. You are not marrying the property, you are buying it. Don’t fall in love with the property, fall in love with the numbers.

        • Angel Rosado

          Great advice! Love me some numbers 🙂 and it really gives me some comfort that I just have to take some my time. I get too excited about my future involvement that I want to just hop in but I know I have to be patient.

  6. I just put my old primary residence into the rental market. The unit has new plumbing under the sinks, 3-yr old heat pump, 3-yr old water heater. It’s a condo, so no exterior maintenance. In this case, I think 10% maintenance is probably high. I was using 5%. Do you still think 10% is better? I know better safe than sorry, but I don’t want to sit on too much if it will not be needed. Thanks.

    • Thank you for the comment!

      Since much of your maintenance is covered by the Condo fees, you can certainly use a smaller figure. 5% may be about right. I would still have a healthy reserve for deposits to be returned, and vacancy (and many other un-foreseen expenses).

      I would hold no less than 6 months worth of expenses, including mortgages, ideally even a slight bit more.

      • Patrick McMahon

        Speaking of deposit accounts — Check with your state & local laws about security deposits because they can be picky.

        For example, in Florida, deposits must generally be in a separate (not commingled) account and you have to provide written notice to the tenant of what bank their deposit is in.

  7. Shadrach Castillo

    I’ve read articles both for and against LLCs for multi-family properties on Bigger Pockets. I remember reading, and I’m paraphrasing, “you don’t need both an LLC and an umbrella insurance policy.” How accurate is it that statement? Additionally, which is the better option? In your post, it sounds like you have both.

    • Denise Evans

      You need the LLC. Sometimes you have a liability in excess of umbrella limits. Sometimes you fall into a coverage gap. I was once the defendant in a boundary line lawsuit over a development project. The neighbor claimed $150,000 of damages for destroying her “old growth hardwoods” (1/4 acre of trash trees like hackberry, poison ivy, and privet) plus $500,000 punitive damages for being an evil developer. My regular property insurance did not cover it. My umbrella would not have kicked in. I had a little General Business Liability policy that cost $500 a year, and they covered the lawsuit! My attorney was paid by the insurance company, but legally and ethically he worked for me. He told me he did not think the GBL policy should have covered that claim, but the insurance company was not his client, so he wasn’t going to bring it up.

      Also, an LLC is a wealth-transfer vehicle that allows you to gift out membership interests that are less than the annual gift tax exclusion, even though the same percentage value of the underlying real estate is worth vastly more than the gift tax exclusion. You can use this to transfer income to a child for college expenses, at their lower tax bracket. You can also use it for estate planning, and retain control of the LLC even though you might have less than 51% membership interest after the gifting.

      You also have to think about creditor considerations, if one deal goes bad and those creditors try to reach your other assets. Umbrella insurance won’t help you there.

      On the flip side, in many states an LLC must hire an attorney to represent it in court. If you own property in your own name, you can represent yourself for routine matters like evictions, quiet title, etc. You should check the laws in your state.

    • I do have both. If someone sues me, and they blow through all the insurance I have, I can jettison the property without affecting the rest.

      Individuals LLCs are cheap to set up, and not really any more work. If you only have one, two or three properties, a single LLC is all you need.

    • Thank you for the comment!

      Far too many investors feel that if they donate their time, it is ‘free’ time. It all costs, and doing somethings yourself to save money is a great idea. Do not ever let the deal be cash flow negative unless you put in the volunteer time.

      • Deanna Opgenort

        I think you can work “free” as long as you are honest with yourself. For me, that “free management” is the means to an end – in under 20 years I’ll own the house outright. I guess in theory I’ve been working for “free”, but my equity has been going up been more than $10k/year, with the cash income going into maintenance that had been deferred by previous owners & modernization/upgrades to make it a more appealing/higher paying rental.

        • Thank you for reading.

          You can work for free, as long as you account for the money. You do not want to have a negative cash flow unit and still be working for free.

  8. Hi Eric, Can you explain the breakdown on separate LLC’s for each property? I have 6 rental homes and I am the management company, in a partnership with my husband. We are getting ready to file our management company as a LLP. We have umbrella coverage on both our personal assets and a separate one that covers our management company.

    • I like the separate LLCs, and a S-Corp to manage the properties. All insurance is for the S-Corp, except property insurance.

      If for some reason you get sued, the property can be given away and you keep the rest. Sort of like a way to jettison the bad property.

      I am not 100% sure it will protect you, but it could.

  9. Adina Edwards

    I’m really glad this article was re-posted! I’ve been educating myself over the last six months, specifically on rental properties, yet this article brought up a few points I hadn’t considered. I will add them into my plans. Thanks for the info!

  10. Stan Searcy

    In Hawaii you have to account for the GET (General Excise Tax) that is collected on all monies (rents) received. That 4.11% can play havoc with your anticipated net cash flow analysis. Most property owners pass that tax on to the residents but if you use the gross income collected and fail to account for that additional money your numbers will be off.
    It would be interesting to talk about the change of perspective and numbers when a potential buyer is negotiating with a seller vs when doing the numbers that can actually be achieved. How much different are those numbers? And after a year of operating a property how close were your actual numbers to what you anticipated?

  11. David K.

    Excellent article. I’ve been staying on the sidelines from buying this past 1.5 years simply because the cash flow on most places near me is so small. Some people are happy with a 3 decker netting $500 a month. I look at something like that as breaking even! Expenses eat up your bottom line, and they come from all over. Rentals take your free time too. It’s not as easy as one thinks. Other expenses people need to think about are snow plowing and landscape. Cut the lawn once a month, and see what your building looks like!

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