Here’s What Landlords Do With Your Rent Payment Every Month

December 28, 2016
by Kelly Gurnett
Contributor
Landlord expenses

We hear a lot about how expensive rent is in many cities. But where does that money go?

While some tenants suspect it’s straight into the pockets of greedy landlords, we wanted to explore the truth — so we talked to seven landlords to get their side of the story.

The public loves to vilify landlords for some reason, but landlords have a lot more expenses and headaches than most people realize,” said Brian Davis, a real estate investor with 15 rental properties and co-founder of the real estate blog SparkRental.

Mark Ferguson, realtor, real estate investor, author and the owner of 14 rental properties in Colorado, agreed: “While it may seem absurd for some people to pay so much in rent, remember that the landlord has to pay a lot more expenses than most people think and even more than many landlords think they will pay.”

Here are the top expenses landlords named when we asked what happens to that big rent payment you give them each month.

Plus, we have two examples of real landlords’ monthly budgets so you can see exactly what the numbers look like — something to consider whether you’re writing your monthly rent check or thinking about investing in a rental property yourself.

1. Mortgage

If your landlord is still paying the mortgage on his property — which many are — a decent chunk of your rent payment goes straight to the bank to pay down principal and interest.

2. Utilities

Some landlords include utilities in the rent, but even those who don’t can wind up paying for them out of pocket.

“When the units are occupied, I have my tenants pay for electric, gas, water, television, phone and internet,” said Andy Panko, owner of two one-bedroom condos in a complex in Woodbridge, New Jersey.

”Even when the unit is vacant, though, there still needs to be electric, gas and water. I have to put those in my name when there are no tenants.”

3. Insurance

Landlords need to carry landlord insurance, which protects their physical property from accidents and sudden loss due to things like fire or severe weather.

They must also have liability insurance, which protects their financial assets in the event of a liability claim, like someone suing them after slipping and falling on an icy sidewalk.

4. Maintenance and Repairs

Whether it’s cash and time spent fixing things themselves or hiring contractors, maintenance and repairs rank high on a landlord’s expense list.

“Most landlords can count on 5 to 20% of the rents received going towards maintenance costs,” Ferguson says.

Kaycee Wegener of Rentec Direct breaks these down into two different types of costs:

1. fixed costs you can estimate ahead of time, including routine maintenance like cleaning, garbage removal and pest control,  and seasonal maintenance like lawn mowing, snow removal and gutter cleaning

2. variable costs you can try to budget for but which may still take you by surprise, including appliance repair and replacement, property damage due to carelessness or normal wear and tear, and emergencies.

“A lot of renters don’t have a good sense for how much it costs to maintain a property properly just because they haven’t yet been property owners,” said Deb Tomaro, Broker Associate with RE/MAX Acclaimed Properties.

“That tree costs $1,200 to remove. That roof is $8,000. That fridge is $800. A good landlord has reserves so that when emergencies arise, they can address them quickly and minimize their tenant’s inconvenience. Landlords who are just scraping by each month may not have the opportunity to build up reserves.”

And even if a landlord has a reserve built up, a bad year can still hit them hard.

Nick Bowman, a landlord in Colorado for 15 years, can tell plenty of tales of unpleasant surprises like “a sudden sewer line replacement for $6K” and “a renter that runs off right before Christmas and leaves the heat off so the pipes can freeze. Those are the kind of nightmares that can really drain your reserve account.”

5. Keeping Everything Up to Code

Landlords are obligated to ensure their properties are safe for habitation, and this doesn’t come cheaply. These “regulation-related expenses” as Davis called them, include things like a rental license, mandatory inspections and annual registration fees.

“In Baltimore, where I have most of my properties,” Davis said, “I have to register and pay annual fees with both the State of Maryland and the City of Baltimore. I have to have a lead paint inspection between every tenancy. I wish I could sell some of my rental units, but no one else wants them for what I have in them; I’ve been forced to overdevelop the properties to comply with local regulations.”

James Richards, a broker with Hot Market Realty in Minneapolis, Minnesota, feels Davis’ pain:

I have been cited by the city for not enough blades of grass per square inch. (Yes, they actually have an inspector that looks for such nonsense.) Any house that was built prior to 1978 must pass a lead clearance test when a new tenant moves in, even if it has passed such an inspection prior. The costs of the tests range from $300 to $500, not to mention the costs associated with getting it to pass the first time, and typically it’s $3,000 to $5,000 or more if the property needs all-new windows.

Richards also points out that “fines [are] assessed to the landlord when a tenant commits a crime: litters the neighborhood, uses too many government services, puts trash in the recycle container, allows license plate tabs to expire, doesn’t cut the grass or shovel sidewalks, etc. The landlord’s fine is typically higher than the offender’s.”

6. Taxes and Fees

In addition to paying property taxes, landlords must also pay tax on the rental income they receive.

While they do receive some tax deductions, getting those deductions can often be a cost in themselves (see next item).

7. Bookkeeping and Accounting

“Rental properties come with bookkeeping and accounting headaches,” said Davis, “which cost both time and money. I pay a bookkeeper and an accountant about $4,000 per year, and I still end up spending 30 to 40 hours per year myself working on my tax return.”

8. Property Manager Fees

Time has value too, so many landlords find it most effective to hire a property manager to handle the day-to-day affairs of their various rental units.

These fees can typically run from 8 to 12% of the monthly rental value, according to All Property Management.

9. Tenant Turnover and Vacancies

When tenants leave, it brings up a whole new set of costs.

“Vacancies are a huge expense for landlords,” said Davis, “particularly in not-so-hot markets. Not only do landlords need to cover the mortgage while receiving no rental income; they also usually need to repaint the entire unit and replace all the carpets. Renters have little incentive to treat the flooring or walls delicately, since it’s difficult for landlords to withhold money from the security deposit to cover those expenses.”

“Most landlords will account 5 to 15% of the rent to vacancies,” said Ferguson.

10. Marketing

And when it comes to finding someone to fill those vacancies, landlords incur costs like credit report fees, professional photographer services for listings and more.

“I do all of my own advertising and tenant screening,” says Panko. “The whole advertising and screening process can be outsourced to a real estate agent; however, they charge a fee equal to one month’s rent every time they find and place a tenant.”

11. Legal Fees

“Hopefully landlords and tenants have a healthy relationship and respect each other,” Panko says, “[but] if not and problems arise, you may need to hire lawyers to consult regarding your rights and remedies under your rental agreement and state rental laws. Worst case, you may need to evict the tenant. That is a lengthy and expensive process”

Richards can attest to this. “To file an eviction costs $340 just for the filing fee, and you have to retain an attorney at the cost of $400 to $500 per eviction,” he said.

“Many evictions end up with the tenant getting a free lawyer from some government agency to fight the eviction. When this happens, it takes longer (lost rent) and costs more in attorney fees due to the fact that a hearing typically has to occur. I have spent as much as $1,500 evicting a tenant.”

To make matters worse, he said, “I can’t do efficient background checks as the free lawyers mentioned above typically expunge the tenant’s record, so even a background check won’t reveal the troubles that lie ahead.”

Davis is in the same boat: “[In] any given month, I have several tenants who neglect to pay their rent. I then have to go through the process of serving legal notices, filing legal motions in court, paying court fees, waiting several months for a court date to show up — all while paying the mortgage on the property and not receiving a dime from the tenants.”

Breaking It All Down

So, what does this all look like on a month-to-month basis?

Ferguson provided this example of what typical expenses might look like on a unit in a suburban Colorado area that rents for $1,500 a month:

  • Mortgage payment: $750 per month
  • Taxes: $100 to $500 per month
  • Insurance: $50 to $150 per month
  • HOA fees: up to $500 per month (applicable only to his condos, which are part of a homeowners association)
  • Maintenance: $75 to $300 per month
  • Vacancies: $75 to $225 per month

“When you add all these costs into the equation,” Ferguson sums up, “the monthly expenses come to $1,050 – $2,425 a month for $1,500 a month in rent.”

Richards gave this breakdown of one of his properties in Minneapolis:

  • Property taxes: $300 per month
  • Rental license: $100 per month
  • Furnace certification: $25 per month
  • Insurance: $100 per month
  • Fines/inspection compliance/city costs budget: $200 per month

“On this property I collect $1,250/month,” he says. “Minus the above expenses, that leaves me with $525 to pay the mortgage, maintenance, turnovers, etc. Meanwhile, the government is making $400 per month and increasing many of my other costs.”

While Richards wishes he could charge less for some of his rentals, his hands are often tied by expenses that are beyond his control. “The thinking that a landlord is ‘rich’ so therefore will eat all these costs is absurd,” he said frankly.

“He or she is in business to make money. Any expenses incurred will be passed along to the tenant in the form of higher rent. Since we are all in the same boat, I won’t price myself out of the market. I would much rather charge less for a good tenant and therefore would gladly lower my rent if the above costs weren’t part of the equation.”

Your Turn: Renters, does this make you look at your rental payment different? Landlords, are there any other expenses you’d add to this list? If you’ve been thinking about becoming a landlord, do these numbers make you reconsider?

Kelly Gurnett is a freelance blogger, writer and editor who runs the blog Cordelia Calls It Quits, where she documents her attempts to rid her life of the things that don’t matter and focus more on the things that do. Follow her on Twitter @CordeliaCallsIt.

by Kelly Gurnett
Contributor for The Penny Hoarder

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