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).
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.
3 Rental Properties Expenses Investors Should Always Anticipate
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?
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.
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!