Landlording & Rental Properties

3 Rental Property Expenses Investors Should Always Anticipate

Expertise: Commercial Real Estate, Personal Finance, Real Estate Marketing, Business Management, Landlording & Rental Properties, Real Estate Investing Basics, Personal Development, Real Estate News & Commentary, Mortgages & Creative Financing
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The stories surrounding the beauty of receiving passive income through rental properties are often enough to get an investor’s heart pumping. However, the increase people owning a whole selection of rental properties but filing for bankruptcy has left me with a dual opinion regarding rental properties (especially during the downturn).

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On one side, it seems like a promising endeavor, as it looks like the kind of investment that could help you generate a lot of passive income — but on the flip side, there certainly seem to be a lot of hidden costs that people are initially unaware of, not to mention a lot of unknown risks factors at play.

While everyone knows about the advantages, such as a consistent flow of passive income and property income growth, many people forget about some of the costs associated with rental properties. Therefore, in order to help you to really get a feel for the overall deal with rental properties, here is a list of some costs associated that you should keep in mind when you decide to take that first step into real estate investing.


Related: How to Estimate Future CapEx Expenses on a Rental Property

3 Rental Properties Expenses Investors Should Always Anticipate

Unexpected Repairs

OK, so while the possibility of earning some passive income sounds great, I feel like I have to remind you that simply buying a property and then renting it out is not the end of your work. It will take a lot of effort to continue the upkeep of a property and to keep on top of repairs. This is absolutely critical, as small issues may lead to bigger ones if they remain unresolved.

In addition, if you’re unlucky enough to meet some big ticket item repairs, i.e. a furnace coming under fire unexpectedly (did you see my play on words?), it might just end up destroying your cash flow for the year. This is especially true if you are utilizing leverage, and the truth is you will very likely move from positive cash flow to possibly coming out-of-pocket — and we don’t want that, do we?

Disaster Tenants

I don’t think that I even need to say this, but here is a short reminder anyway. There are no guarantees surrounding tenants, so even with the most seemingly amazing of renters, receiving payment is never a 100 percent guaranteed fact.

OK, sure, perhaps you will find one amazing renter who always pays their rent on time month after month, but even so, they are like a clock — you never know which day they will stop ticking. Not to mention, there is no doubt that there are some renters out there who are full of lame excuses as to why they can’t pay, and all that time you put into their eviction along with the money lost from unpaid rent will surely cause some major frustration. As you move up or down in different property classes, this risk can be minimized or increased but never quite eliminated.


Related: 12 “Hidden” Real Estate Expenses That Blindside Investors

Taxes, Fees and Insurance

It doesn’t matter whether or not you have tenants residing in the house because either way, you will fall prey to the cost of homeowners’ association fees, property taxes and insurance associated with the property.

While this comes as no surprise and you will probably be warned about it way in advance, this is definitely a cost that will cut deep into your pockets. Not to mention, if you don’t have a steady income coming from renters, these costs (which by the way are not insignificant) are most certainly going to get personal.  

There are risks associated with just about everything in life. Do not let the simple fact that they exist discourage you from making the leap in this industry. Real estate is very lucrative and has plenty to offer!

Investors: What would you add to this list?

Let me know with a comment!

With just under a decade of experience in the real estate industry, Sterling currently manages over $10MM in capital, which is deployed across a $26MM real estate portfolio made up of multifamily apartments and single-family homes. Through the company he co-founded, Holdfolio, he owns just under 400 units. Sterling was featured on the BiggerPockets Podcast and has been contributing content to BiggerPockets since 2014, with over 200 posts on topics ranging from single-family investing and apartment investing to wholesaling and scaling a business.

    Douglas Skipworth Rental Property Investor from Memphis, TN
    Replied over 3 years ago
    Another good article, Sterling. I agree with you that investors need to make conservative assumptions regarding tenants. We always try to over estimate vacancy and collection issues even though many investors use unrealistic numbers. Our experience has been that if you prepare for the worst, it can only get better. I think it was Churchill who said if you want peace you have to prepare for war. Conservative assumptions and careful planning are how real estate investors prepare to avoid disaster. Thanks for the thought-provoking post!
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    Love the quote you provided by Winston Churchill. Totally agree with your point. Being conservative will help for the long haul. It’s always best to cushion your rehab numbers rather than purchasing a deal on a shoe string rehab buying decision. That concept has always worked for me
    Dave Chapa Rental Property Investor from Katy, TX
    Replied over 3 years ago
    These are great reminders! You should feed a capital reserves fund for all your properties. Unexpected repairs do happen however, not all at once (you hope). And, some items can be fixed before it becomes a major issue, which can cost you more. The key for me has been to be proactive, not reactive. Knowing what needs to be fixed and prioritizing. This has saved me time and money. Just an example of one item we has to fix at our apartment: One of the 50 gal water heaters was on its last leg and I knew it need to be replaced very soon. It’s mounted in the attic so if it went, it could have caused damage to two of the units. Also, the access door was too small and had to be removed to install the new water heater. (Because of the new laws, the water heaters are larger in diameter) Proactive: I had time to research price and options for the repair. Assemble my team (Me and my maintenance man) and scheduled a time with the tenants to remove and replace the water heater. Total cost $625.00 (this includes the removal and reinstalling the access door) Reactive: The water heater busted! We are scrambling to get it fixed! I would have called my plumber to fix (because I don’t have the luxury of time) and he quoted $1,200 to $1,400. Plus the cost to remove and reinstall the access door. Also, there could have been water damage. Another note is to always add in capital reserves in your numbers before buying a property. We estimate $250 a door when we bought our property and the numbers still worked very well. However, the next property we buy, depending on the age, I will most likely add $350 to $450 a door because of what I learned on this property.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    Totally agree with your above point Dave and also thank you for the breakdown for the readers.
    Sam Smith from Chicago, IL
    Replied over 3 years ago
    Thanks for the reminder.
    Kevin Izquierdo from Hillside, New Jersey
    Replied over 3 years ago
    from what I hear from unknowledgable people when they talk real estate is that old excuse,”taxes are too high to buy houses.” Trying to explain to them that taxes should be part of your calculations and if its a great deal, taxes shouldnt be a huge deal. Great article!
    Bridget Poston Rental Property Investor from Newport, OH
    Replied 6 months ago
    Very useful Sterling! I have yet to buy my first rental property and will be keeping these points in mind as I go through the process. Thank you!