Investment Properties: 10 Costs to Know About

A landlord owning several investment properties each collecting a sizeable passive income – isn’t that the dream?

While it’s certainly possible, it’s not that simple: aside from the income earned, there’s another crucial part of this equation and that’s the expenses investment property owners are on the hook for to keep their rental unit up and running.

Understanding your upfront and unforeseen costs will help you determine how to price your rental unit and how much revenue you’ll net from your investment property.

Rent prices are slated to increase by five percent across the U.S., according to 2023 estimates from the National Association of Realtors (NAR). This is great news for aspiring landlords, as rent prices already skyrocketed in 2022 to as much as $2,495 per month on average, real estate industry estimates suggest.

But you won’t pocket that full sum each month. Landlords need to account for fixed expenses, including their mortgage, property taxes, and homeowner’s association (HOA) fees. And then there are the emergency costs, such as replacing the roof or repairing broken appliances your tenants need for day-to-day living.

Budgeting for rental property expenses is a crucial exercise new investment property owners must do to make sure their venture is profitable. It’s also great for record-keeping – hang onto receipts and contracts because some of these expenses can be deducted from your taxes.

To help you get the job done, here’s an in-depth look at common investment property expenses to account for before purchasing your new home and setting its rental price.

Mortgage Payments

Unless you paid for your investment property with cold hard cash, your monthly mortgage payments should top the list of priority fixed expenses as a landlord.

The median single-family home price in 2023 is slated to reach $385,800. As of September 2022, the monthly mortgage payments in the U.S. sat at roughly $1,912, according to the NAR. 

You may not necessarily have the funds readily available to make these payments. On average, U.S. homebuyers applied a 13 percent down payment to close on their home, which may have cleared out their rainy day fund.

But make sure the price you set your rental unit for doesn’t just cover your mortgage because you’ll see below, there are plenty more expenses to account for.

As a rule of thumb, industry experts recommend investors charge about one percent of their property’s purchase price for rent, (including the cost incurred from major repairs and renovations if you aren’t buying a new home).

If, for example, you bought your investment property for $150,000, the one percent rule dictates that you should – at the very least – charge a monthly rent of $1,500 while your mortgage payment should be less than $1,500.

Landlord Insurance

Homeowners typically must have a homeowner’s insurance policy paid for and in effect at closing to cover any physical damage to their property caused by wind, fire, vandalism, or theft. But for investment property owners, landlord insurance is your better bet.

That’s because homeowner’s insurance coverage is limited to protecting the homeowner residing in the property, which may not be the case if you’re renting the entire home to a family or several occupants.

Instead, landlord insurance will provide coverage for the building itself from fire, wind, lightning, hail, or other adverse weather-caused damage. It’ll also cover landlords’ loss of rental income if their property is damaged from natural disasters, theft, and vandalism and cannot be occupied.

This coverage may extend to the furniture and appliances landlords provide to their tenants, depending on the type of policy you buy and the amount of coverage it provides. Keep in mind, your tenants must buy renter’s insurance for coverage of their personal belongings, which you should insist on especially if they’re moving in with expensive electronics, furniture, clothes, or artwork, for example.

Landlord insurance can also provide liability coverage if tenants are injured on your property. Triple-check with your insurance provider to make sure you’re getting an ironclad policy that covers all your concerns as a landlord.

This expense is typically paid annually, so you’ll need to account for this expense in your budget breakdown.

Property Taxes

Alongside your mortgage and insurance, paying for annual property taxes are another rite of passage for homeowners, and investment property owners are no exception!

Property taxes are calculated by your local county and state governments and is typically based on the valuation of your home, according to the NAR.

These taxes are used to keep your community up and running, including funding schools and libraries, maintaining parks and community centers, and conducting road repairs and upgrades.

Usually, they’re a prepaid expense meaning they must be paid at closing on your new home. After that, make sure you circle your due dates on your calendar – if you forgo your property taxes, you could face a lien against your property.

Property taxes will vary, depending on where you live in the country. Regardless, factor this expense into how you calculate the price of your rental because they can easily amount to a couple of thousand dollars each year.

HOA Fees

If you’re buying a home in a condominium development, a complex of townhouses, or a gated community, you may incur another annual expense: HOA fees.

These cover the cost of clubhouses, pools, community parks, fitness centers, trash removal, security, and fire alarm systems. While it’s another expense to add to your tally, it may be worth the cost as these extra amenities can boost how much you charge for rent. Tenants may decide it’s worth the extra $100 in rent compared to your competitors because they’ll have access to a gym, pool, and year-round gardening and snow removal services.

Vacancy Costs

From tenant turnover to major renovations, sometimes your investment property is going to sit vacant, not collecting a penny of rental income. For this reason, you’ll need to budget vacancy costs into your expenses.

There is a silver lining, though: the rental vacancy rate sat at just 5.8 percent in the first quarter of 2022, lower than the estimate at any point during the 35-year period from 1985 through 2019, according to 2022 U.S. Census Bureau data.

Plan ahead with this expense: if your new tenant is signing up for a one-year lease, expect a vacancy of about one to two months, which may be needed to prepare your investment property when they move out, list your unit on the rental market, and secure your next tenant.

While your investment property sits unoccupied, you’ll still need to stay on top of your expenses.

Maintenance and Repairs

A leaky faucet, a broken lightbulb, or a rogue pest – if your tenants have any issues with their rental home, the onus is on you to find (and pay for) a solution. With this in mind, earmark an annual budget of about 10 percent of property rent toward maintenance and repairs.

The budget allocated to this category should include everything from changing lightbulbs, smoke detector batteries, and HVAC filters, to providing lawnmowers, snow blowers, or other tools for household maintenance.

If you’re buying a brand-new property, you may not need to invest as much into repairs and maintenance. Take stock of your investment property’s state and estimate how much you may need to pour into keeping the rental in great shape.

Property Upgrades

Besides ongoing maintenance, you may decide to further invest in your rental property with upgrades like smart home appliances, heated floors, or modern, sleek kitchen cabinetry.

These add-ons can attract top-notch prospective tenants and drive up the cost of monthly rent. If you’re buying an existing home that needs a little extra TLC, this could mean investing in roofing, double-glazed windows, or a new washer and dryer for your tenants.

As a rule of thumb, budget roughly 10 percent of your gross monthly rental income to save for these major upgrades. When the refrigerator gives up or the water heater is on its last leg, you’ll be thankful you were proactive and siphoned off cash for these out-of-the-blue issues.

If you’ve already made major upgrades to create a sparkling new rental unit, factor the costs incurred into your rental price from the start.

Property Management and Tenant Screening

Property management, including marketing your rental unit, finding a trustworthy tenant, and making sure they stay on top of their monthly rental payments, can be a full-time job that you may choose to delegate to a property management company.

They may have a professional photographer with the right equipment and lighting to take perfect snapshots of your home for a listing, and an advertiser with the magic touch to craft an appealing listing to draw in the masses.

Your property management company can also take care of the day-to-day operations, including screening tenants, collecting rent, and touching base with tenants to see if they’d like to renew their contract before their lease is up.

A great property manager can help your bottom line by discovering higher-quality tenants, creating shorter vacancy cycles, and streamlining the process so you have fewer responsibilities on your plate.

If you decide to take this route, the cost may range from about five to 10 percent of your monthly rent.

If you prefer to save the cash and do the job on your own, you can factor in the time and costs incurred for your labor. For example, there are tax deductions for travel expenses for tenant showings, shopping for supplies, or visiting the rental to make repairs. You can also apply tax deductions if you use part of your home to conduct business, such as a home office.

Closing Costs

A property appraisal, a home inspection, and attorney fees are just a few of the laundry list of expenses you’ll pay to close on your rental property.

Securing the financing to buy your rental unit isn’t a cheap endeavor, and these closing costs should not be overlooked when setting your budget.

Closing costs are an umbrella term, encompassing all the administrative and legal fees you must pay for, including loan origination fees, a title search, and real estate transfer tax (if applicable). All in all, you should count on closing costs to be about two to five percent of your home’s purchase price.

You can factor some of these expenses into how you set your unit’s rental price, so you aren’t eating the cost alone.

Utilities

Traditionally, tenants will set up and pay for their utilities, from water and electricity to internet and heating. However, this may not work depending on the way your rental unit is set up.

You could, for example, have a multi-family property you’re renting out, in which you’re in charge of providing utilities to several tenants.

If this is the case, utility expenses may include electricity, gas, heating and cooling, water, cable TV, and internet. This is another expense you can deduct from your taxes, too.