Don't Buy a Rental Property if You're Not Ready for These 12 Expenses

Owning rental properties can be a powerful way to generate profits and a great addition to a balanced investment portfolio, but there's more to it than simply buying the place and collecting the rent.

There are up-front and ongoing costs that come with property ownership, and while it's typically considered passive income, that cash flow can take some active oversight during both your time as owner and at the end if you choose to sell.

A good rule of thumb is to expect to pay about half your rental income for taxes, insurance, repairs, maintenance, and other expenses. Here's a look at the big-ticket items to consider before you take the plunge.

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First, you have to buy the place. Are you financing it? That's the first item to consider -- that monthly payment versus what you can expect in rental income. The difference there is your profit, less the other expenses to come that can add up quickly, as you'll see in the next slide.

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Conventional wisdom says maintenance typically costs about 1% to 4% of the property's value per year. Some quick math: 2% of $500,000 is $10,000. Divide that $10,000 by 12 to get $833.33 per month right off the top. It's easy to see how quickly you can get to half the rent going toward covering all the expenses of being the property owner.

Turnover and vacancy costs will vary depending on your market and property, but calculate as best you can how often you'll be turning over tenants and deduct that time without rent coming in from your expected income.

Good ways to guesstimate include looking at the property's record, if available, and networking with other landlords with similar properties around you.

Property taxes are the responsibility of the owner of the property, and you'll need to include that expense when calculating the rent you'll need to charge to make a profit on your property. Rates are often higher for commercial and non-owner-occupied residential properties.

ALSO READ: Taxes on Investments: Understanding the Basics

Be sure to include in your budgeting the cost of liability insurance and property and casualty insurance. The type you'll need depends on the type of rental involved: Business or residential and long-term versus short-term -- those are just two factors insurers will consider when they set your rates.

Expect to pay around 25% more than you do for an equivalent owner-occupied homeowners insurance policy.

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A certificate of occupancy is needed in most places before you can legally allow a tenant to move in and can be required for both new construction and existing properties, including when they change hands.

Expect a visit from government inspectors to ensure compliance with building and zoning codes. Fees vary based on the jurisdiction and size of the property.

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Your city or county may require a housing business license, in some cases, one for each rental unit. Office and retail rental spaces also typically require a business license or permit. Be sure to check with your local jurisdiction for the rules and costs.

Also, expect these licenses and permits to be recurring and to have to pay the fee each time one is up for renewal.

Whether you factor it into the rent or pay it yourself, you need to be aware of the costs of heating and cooling your property.

Ask the provider -- or providers if there's one for electricity and one for gas -- what the records show for average use at the property. Then decide whether you're paying it and including it in the rent or leaving that to the tenant.

ALSO READ: 4 Ways I Keep Home Maintenance Costs Down

In some jurisdictions, water is provided by one entity and sewer by another. In others, by one and the same. Same with trash and recycling. Check with the providers for the property's billing history, as rates for residential rental and commercial properties can vary.

There could also be times you might have to pay extra to a private operator to haul away things larger than the regular service will handle. Limbs from storm damage are but one example. Stuff left behind by former tenants is another.

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You may decide to have someone else do the work of managing the property, including collecting the rent, but it'll cost you, typically 8% to 12% of the monthly rent for a single-family home. They also often handle maintenance, passing those expenses on to you as well, and include marketing the property as part of their services.

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Whether you do it yourself or use a broker or other professional, expect some expenses when it comes to screening potential tenants. For do-it-yourselfers, the Fair Credit Reporting Act allows you to check applicants' credit -- with their consent -- and you can probably expect to pay $25 to $75 each time.

ALSO READ: What is Rent-to-Income Ratio and Why Should Landlords Care?

When the time comes to sell, hopefully, it'll be for more than you paid in the first place. The difference, of course, is subject to the capital gains tax, which can be as high as 20%, depending on your income.

There are ways to offset that, including putting the profits into tax-advantaged real estate deals, like 1031 exchanges and qualified opportunity zone funds, or simply balancing profits with losses, if you have any of those. But that's all a topic for another discussion.

Owning rental property can provide plenty of profit but also pitfalls. The latter can give way to more of the former if you go in with your eyes open about your initial expenses and what to expect throughout the lifetime of the investment.

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