real estate

4 hidden costs of being a landlord

Neighborhood
Highlights
  • Costs associated with rental properties may surprise new landlords.
  • Tax and insurance costs often rise for property investors.
  • Other costs include legal fees and cleaning costs.

Life as a landlord may be tempting to homeowners unable to sell their homes and others looking to add properties to their investment portfolio.

However, many costs associated with rental properties catch novice landlords by surprise. The following are four hidden expenses experts say new landlords should consider.

1. Increased insurance costs

Rental homes may cost more to insure.

For example, homeowners who cannot sell their homes should be aware that renting out the home changes the owner's status from primary occupant to "investor," says Brian Mikelbank, an associate professor of urban studies at Cleveland State University, in Ohio.

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As a result, it costs more money to insure the home with a special landlord insurance policy. According to the Insurance Information Institute, the premium is about 25 percent more than with typical homeowners insurance.

The tenant rent payment may help cover the increased expense, but Mikelbank says landlords shouldn't always count on it.

"Homes will usually have tenants for less than 12 full months out of the year, since it takes time to find a renter, or a tenant could potentially leave before their lease is up," he says.

2. Legal fees and administrative charges

Landlords should budget money and time for getting legal advice, learning their rights and drafting rental agreements, says Lisa Sevajian, a Realtor in North Andover, Mass.

"Some attorneys will charge a flat rate of about $200 for landlord services," Sevajian says. Other lawyers may charge by the hour.

Owners should also be prepared to pay for additional work if a tenant needs to be evicted, or there is some other legal dispute, she says.

In addition to legal expenses, landlords will have to pay for administrative costs related to interviewing potential tenants, running their credit histories and checking references, Sevajian says.

Property management companies can handle these tasks for the property investor, but typically charge about 10 percent of each month's rent for their services.

Many municipalities require owners to register rental homes and make them available for examination, Mikelbank says.

"The city will send out an inspector to make sure the property is up to code," Mikelbank says.

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If there is a defect, the owner will have to pay to fix the problems, he says.

Some municipalities also ask new landlords to attend day-long training classes that cover topics such as how to find good tenants, best practices in property management, and how to spot and report potential illegal activity.

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