For a homeowner who is having difficulty finding a buyer for their home, the option of renting it instead may be a tempting one. As a novice landlord, it is important to know the following five hidden expenses.
Insurance Costs Will Be Higher. Renting a house changes the homeowner’s status from primary occupant to investor. Insuring a home with a landlord insurance policy can cost a homeowner almost 25 percent more than the premium for the average homeowners insurance.
Rent paid by tenants should not be relied upon to cover the sudden expense increase, as the time it takes to find tenants. When you add the possibility of a tenant skipping out on a lease, it makes it a risky gamble.
Administrative Charges. The cost of administration is not low. Simply interviewing potential tenants is a process that includes running credit histories and checking references. Many cities require landlords to register their rental homes and send inspectors regularly. If there are problems, the owner will have to fix them out of his or her own pocket.
Some cities even require new landlords to take training classes due to the increase of casual landlords who are still new to the legal regulations involved. Administrative costs can add up to a couple hundred dollars per year.
Legal Fees. Learning how to draft rental agreements or evicting tenants, is where a lawyer gets involved. Real estate law lawyers in Chicago suggest that hiring an attorney is an expensive, but necessary, step to becoming a landlord.
Maintenance. For a house to attract renters, it needs to be marketed as a clean and attractive living space. Everything from a leaky faucet to an unmanageable hedge must be attended to, meaning maintenance and upkeep alone can add up to over $1000.
Tax Increases. The downside to owning an investment property is that tax breaks, such as the homestead exemption, do not apply. Turning a primary home into a rental will mean higher property taxes. If a homeowner decides to put a property back up for sale after renting, and they have not lived there for at least two of the previous five years, they will lose their capital gains tax exemption.
This is not to say that renting a home means solely losing money. Some landlord expenses actually generate tax breaks. Starr, Bejgiert, Zink & Rowells suggests that novice landlords ask a tax professional about their individual tax situation.
