Some people become landlords to make substantial profit, while others are simply thrust into the position via tanking home prices, inherited property or other uncontrollable issues. Regardless of whether you're in one of these positions, it's important to realize that being a landlord is nowhere near all profit. In fact, there are several hidden fees you may not recognize until they rear their ugly heads.
Increased Tax Bill
A larger tax bill is an unforeseen cost you could encounter as a landlord. You no doubt expect to pay taxes on the property you're renting out to tenants, but you might not realize those taxes could be higher than what others in the area pay.
In many areas, individuals who live in their homes receive a tax break known as the "homestead exemption." While this tax law will vary by state, it allows homeowners who reside in their residence an exemption on certain property taxes. If you own a home you don't live in, however, you will likely lose this exemption. This is why you should always take measures to lower your property taxes.
A disheartening set of hidden fees, especially for first-time landlords who were sure they found the "perfect tenant," are those related to legal costs. Regardless of your thorough tenant background and credit checks, you'll eventually run into one whose actions land you in court.
Historically, landlords would often need to hire attorneys, at least for the first few courthouse visits, to assist in legal efforts. This included everything from beginning the eviction process to defense from a tenant suing over a forfeited security deposit.
Fortunately, online property management tools can make your job easier. Many of these provide state-specific legal documents to terminate a lease or evict a tenant. This is a substantial savings over hiring an attorney, but it's still a potential hidden fee for which you should prepare.
Even if you avoid increased taxes and legal fees by living in a landlord-friendly state, you're unlikely to avoid landlord marketing costs. Since you lose money every day your rental unit isn't occupied, you must spend funds to market the property and end the slow drain on your finances.
You can always put out a sign on the lawn or post the property on Craigslist, but your actions aren't guaranteed to attract the largest variety of prospective tenants. Spend the extra money for a newspaper ad, or list the opening in a rental property periodical. You could also save a bit of money by utilizing property management mobile apps to list your properties.
You may believe a homeowners insurance policy will cover your property, but in all likelihood, you've been misinformed. Insurance companies view the risk of insuring the home you live in and a property you rent out very differently.
In fact, the Insurance Information Institute states that, on average, you'll spend about 25 percent more on a landlord policy than you would on a typical homeowners policy. This is a large hidden fee, but don't try to tiptoe around it. You might be out of luck if something detrimental happens to your property and you don't have the right insurance policy.
While working as a landlord can be a very rewarding experience, it's not without its costs. Fortunately, it is possible to minimize some of these expenditures, and as long as you know what to expect, you'll be more equipped to handle these fees when they do arise.
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