Managing real estate investment property (i.e., being a landlord) is a business. The upside is huge, but there is also great risk, as with most businesses. It’s not just about revenues rolling in. These real costs and expenses are unavoidable and may impact your bottom line. It takes experience and a bit of luck to raise profits during challenging times. We can all agree that life is not quite as simple as it used to be in the landlord business.
Carrying costs, in particular, are to be monitored closely. Most property owners know that now, more than ever, carrying costs can offset any huge profit expectations. The biggest teacher is experience. If you don’t factor in enough margin, you can be caught by surprise.
Some runaway costs and money losers include rising property taxes, fuel prices, labor shortages, and supply-side delays, which lead to higher material costs for repairs.
Common Carrying Costs
The cost of money is on everyone’s mind these days. Mortgage rates for investments have interest rates that are 0.50% to 1% higher than those of owner-occupied loans, which are running near 8% these days. With such high rates, monthly mortgage payments are considerable, and to turn a profit, rent charged must be higher. Property taxes are another regular expense that generally only goes in one direction—up, based on your local property tax rates and your property’s assessed value and size.
Besides raising rents, maybe it is time to get your tenants separate meters for utilities, such as gas and electricity, plus itemizations for water and monthly trash collection fees. These costs add to a landlord’s expenses, and some can be passed off to the tenant as additional rent or for the tenant to pay directly.
It’s also prudent to shop around for the best property insurance carriers, as landlord policies typically cost around 25% more than homeowners insurance. The actual annual cost will vary, depending on your property’s size, value, and location.
The same goes for legal fees for evictions and abatement disputes with corporate landlords. Seek attorneys in your area who are willing to be pragmatic and add value to your legal fees.
Other carrying costs include routine maintenance—like painting, changing locks, repairing appliances, and more—which can add up fast. Maintenance needs differ from month to month, making it difficult for new investors to budget for this carrying cost. While proper maintenance can help prevent breakdowns or major repairs over time, a few snowstorms or unexpected boiler repairs can mean pricey bills if you don’t have a regular handyman to do the work.
Major repairs are also big costs and may come as a surprise. Landlords are on the hook for big-ticket repair items, like roof damage, HVAC replacements, and plumbing upgrades, all of which can make or break a property’s bottom line. One way to prepare for such capital costs is by forecasting depreciation and setting aside funds for future repairs.
If you hire a property manager to manage your property, collect rents, and lease units on your behalf, you’ll likely incur a monthly fee. Like many carrying costs, property management fees vary depending on the size, location, and condition of your property, plus the level of service the company provides.
Tenants and Vacancies
Vacancy of a unit can quickly cost you. Without generating income, a vacant property quickly becomes a money pit. The investor must cover mortgage payments, property taxes, and utilities out of pocket.
Evicting a bad tenant is another cost that every landlord should account for in budgeting. Courts are overloaded and to be avoided as we cycle out of the COVID-era hardship cases. We all know that time equals money when it takes one year or more to get a bad tenant out and a good one in.
Sometimes, a tenant goes rogue and stops paying rent altogether, which can be far worse than having a vacant unit. Often, unhappy tenants can retaliate and cause havoc for a landlord and NYC courts. Prosecuting eviction of a holdover or defaulting tenant is often the worst place to be, both literally and figuratively. Proceed with caution, and try to keep some cash on reserve at all times. These days, “cash-for-keys” is a reality, and landlords sometimes pay a ransom in eviction matters to get a tenant out for a fresh start.
Hopefully, your real estate investment has appreciated over time, your tenants have been good caretakers, and you have a performing asset. Following the above tips and guidelines can help you control your carrying costs so you can make the most of your investment.
Janet Nina Esagoff is a Great Neck attorney and founder of the Esagoff Law Group, P.C. Her practice focuses on helping individuals and businesses in civil litigation, contract law, and real estate matters, including landlord-tenant law.