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In these times of economic uncertainty, many people are looking at adding tangible assets to their portfolios and property can be one of the most lucrative options, both in the long and short-term.
However, those considering entering the rental market must ensure they factor in all the costs and have the full financial picture as unexpected expenses could easily derail their investment plans. Below, a veteran property professional takes a closer look at the eight costs that are often overlooked or underestimated.
Caption: FINANCIAL SAVVY: It’s crucial to be aware of all the costs pertaining to rental properties as some of them can easily go unnoticed and these can significantly impact your bottom line
8 COSTS THAT LANDLORDS OFTEN UNDERESTIMATE WHEN SETTING EXPECTATIONS
Investing in rental properties can be a lucrative venture, but it’s essential for landlords to set realistic expectations and account for all potential expenses before taking the plunge. This is according to Claude McKirby, Co-Principle of Lew Geffen Sotheby’s International Realty in Cape Town’s Southern Suburbs, who adds: “While rental income can provide a steady stream of cash flow, many landlords underestimate the true cost of property ownership, and this can put a significant dent in returns or even result in financial loss.
“Being a landlord comes with its fair share of responsibilities and expenses. While some costs may be obvious and easy to track, there are certain expenses that landlords often overlook or underestimate.
“Accurate budgeting from the get-go is therefore paramount as it ensures investors understand the full financial picture and prevents unexpected expenses from derailing investment plans so landlords must carefully consider and budget for all potential expenses when setting expectations for their rental properties.
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“Thorough budgeting also enables investors to set realistic expectations, make informed decisions, and maximise returns on their investment.”
According to McKirby, the following costs are those which are most commonly underestimated or even overlooked by landlords:
1. Property Maintenance and Repairs
Repairs are a big expense that is often underestimated or even overlooked. And although some are quick and easy fixes like a leaking tap, many are costly and can break the bank if realistic repair costs haven’t been factored in. Landlords must also budget for ongoing maintenance and repairs to keep their properties in good condition. From routine upkeep like landscaping and cleaning out gutters to unexpected repairs such as plumbing leaks or appliance failures, these expenses can quickly add up and eat into rental profits.
2. Tenant Turnover and Vacancy Loss
Vacancy periods between tenants can result in significant income loss for landlords. Many landlords underestimate the time it takes to find new tenants and the associated costs of advertising, screening applicants, and preparing the property for rent. Every day your property is vacant, it still costs you the same as when there is a tenant, so it’s essential to budget for potential vacancy periods to avoid financial strain during downtime.
3. Poor Quality Tents
Having poor-quality tenants can be costly to your rental business as they not only cause you stress but can put your business at risk of financial losses. Problematic tenants may not pay rent on time, which can disrupt your business’ cash flow and they may also cause damage to the property through negligent behaviour, which will ultimately increase your maintenance and repair expenses.
4. Property Management Fees
Hiring an agency to manage your property is recommended for many reasons, including the fact that they can properly vet prospective tenants and have a thorough understanding of the regulations pertaining to this sector. However, landlords often overlook the cost of these services when doing their sums. Property management fees typically range from 8% to 12% of monthly rental income, depending on the level of service provided.
5. Utilities and Property Taxes
While tenants may be responsible for paying some utilities, landlords often underestimate the cost of utilities not covered by tenants, such as sewer, and trash collection services. Additionally, property taxes can vary widely depending on location and property value – and increases can sometimes be hefty – so landlords must account for these expenses when setting rental rates.
6. Legal Fees and Eviction Costs
Landlords may encounter legal issues related to tenant disputes, lease violations, or evictions, which can result in significant legal fees and court costs. Many landlords underestimate the potential cost of legal proceedings and eviction processes, so it’s crucial to budget for these expenses and consult with legal professionals when necessary.
7. Capital Expenditures
Landlords often overlook the need for capital expenditures to replace or upgrade major components of their properties, such as roofing or window frames. These expenses are essential for maintaining the long-term value and functionality of the property but can be substantial and unpredictable.
8. Neighbourhood changes
When you bought the property, it was a clean, safe neighbourhood but over the years, unfortunately the suburb has become a bit run down and crime has escalated. This will impact not only the appreciation of your investment but also the rental return.
“As a landlord, it’s crucial to be aware of which costs can easily go unnoticed, especially when they can significantly impact your bottom line and by accounting for hidden expenses, you can better protect yourself and your investment properties,” says McKirby.
