We hear it all the time. Someone owns an income property, so they must be financially well off. Generally, a tenant will come out with a comment such as this. This article is written more to the tenants of the world, as opposed to the landlords. What the tenant doesn’t realize often hurts the investor, because they often times don’t fully understand the depth of the charges incurred by a landlord.
In seeking to change the mindset where the landlord just pockets the rent money every month, tenants should consider the following expenses that the landlord is ultimately responsible for. All of these expenses are deducted before the landlord even considers taking any sort of draw.
First and foremost, landlords have to pay the mortgage! Just because a landlord owns a property doesn’t mean that there isn’t a mortgage. The bank wants their payment each and every month on the first, just like the landlord! This is generally one of the largest debt loads the landlord will carry, and they carry it for a term of 15, 20, sometimes even 30 years!
Once the mortgage is paid, the landlord sets aside money for taxes and insurance. Depending on the mortgage, the landlord may have to set aside money for mortgage insurance, as well as for property insurance (to cover their losses – tenants should carry a renter’s policy!) Aside from insurance policies, the landlord needs to set aside money for taxes. Many areas will have a city, village, or town tax, as well as a county tax. In addition, some areas also require a separate tax for schools (while other areas include it in the city tax). The rate for insurance and taxes is higher on a rental property than for an owner occupied property as well.
In addition to taxes, many localities will also tack on additional fees which must be accounted for. For instance, Buffalo tacks on a “User Fee” bill every quarter to cover garbage pick up and totes, as well as charging for Rental Registration in buildings that are not owner occupied.
In some instances, the landlord will have to pay for utilities. Are there lights on in the hallway when you come in to your apartment at night? What about outside illuminating the parking areas or dumpsters? The landlord pays that electrical bill. Is your heat or hot water included in the rent? The landlord is paying that gas bill to ensure you stay warm. If you enjoy a shower in the morning, you will appreciate your landlord making sure that the water bill is paid up every time it comes due. And that waste water from toilet flushes and shower drains has to go somewhere. This is charged back to the landlord as well, either in the form of a line item on a water bill or a tax item.
And of course, nothing works forever. When the landlord comes in and replaces your faucet because the handle snapped off, that comes out of a maintenance budget that must be planned for. This can be a minor repair in and of itself, but what happens when the hot water tank dies and needs to be replaced? This is quite a bit more substantial. Staying dry is important (especially when you are in your apartment), so the landlord has to set aside money each month for larger repairs, such as a new roof, updating electrical service, or other large repairs.
Landlords are in the game to make money, and anyone who says different is trying to pull the wool over your eyes. However, understanding that there are a lot more expenses that go into owning a building is important, even as a tenant. The landlord is there to provide you with safe, reasonable accommodations in which to live. However, he has to cover the back end of things as well. Keeping these things in mind, and being a cooperative tenant, can get you a long way in the eyes of your landlord!
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