Rental Property Essentials: Understanding Costs and Tenant Approval Challenges

Owning a rental property sounds like an easy way to make money. You buy a place, find a tenant, and collect rent every month. Sounds easy, right? Not quite. In reality, you will have to deal with surprise repairs, ongoing costs, and the challenge of finding qualified tenants. Let's deep-dive and learn more about rental property expenses and the challenges you will face when approving tenants. 

How Property Expenses Impact Long-Term Rental Investment Returns

Many investors ask what capital expenses are for rental property when analyzing long-term costs. All landlords want profitable returns, but high expenses can slash those returns quicker than you think. If you plan on building wealth with rental properties, it’s important to know where your money is going.

Here are the most typical recurring expenses: 

• Monthly mortgage payments: If you financed your property (which you probably did), your mortgage payments will likely be your largest monthly outgoing.

• Property taxes: Property tax rates vary by county and can also increase over time.

• Insurance: Landlord insurance includes coverage for the building itself, liability protection, and may cover lost rental income, as well.

• Property management fees: If you use a property manager, you can expect to pay about 8–12% of your monthly rent payment.

• Maintenance and repairs: Running toilets, broken appliances, and worn-out carpet don't fix themselves. Be sure to set some money aside for maintenance and repairs.

• Vacancy costs: Unfortunately, there are months when you may not have a tenant. But that doesn't mean your mortgage goes away.

A helpful guideline to follow is called the 50% rule. Essentially, it states that about 50% of your gross rental income will go towards expenses, excluding mortgage payments. If your rental property generates $2,000 per month in rent. You can expect to pay about $1,000 a month in costs.

In addition to knowing your costs, savvy landlords keep an eye on their cash-on-cash return. Cash-on-cash return is the ratio of how much cash profit you are earning against how much cash you invested. A healthy cash-on-cash return on a rental property is typically between 8-12%.

Bottom line? When eyeing rental properties, don’t just look at gross rent income. Focus on net income after all expenses. That’s how you’ll know if your investment is truly profitable.

What are Capital Expenses for Rental Property

Capital expenses, or CapEx, are large expenses that occur infrequently but can be extremely costly when they happen. Capital expenses are defined as significant upgrades or replacements that improve the longevity of your property.

Here are some examples of common capital expenses:

• Roof replacement: $8,000 - $20,000+ 

• HVAC: $5,000 - $12,000 

• Water heater: $800 - $2,000 

• Flooring (complete replacement): $5,000 - $15,000 

• Appliances: refrigerators, stoves, dishwashers, etc. 

• Plumbing & electrical: Requires full replacement in older homes, usually costing tens of thousands of dollars.

• Foundation & structural repairs: Fortunately, these don't happen often, but can be very costly.

Instead of reacting to CapEx when they're thrown at you, plan for them ahead of time. Most property owners set aside 5 to 10% of their monthly rental income in a "reserve fund." When your HVAC decides to kick the bucket in July, you won't have to panic. Simply pay for the repair or replacement with your savings.

CapEx can also be estimated by analyzing the age of each system in your home. If your roof is 18 years old and has a 25-year lifespan, you know you'll be replacing it in the next few years. Plan it into your budget now.

Can I Rent an Apartment With Bad Credit, and What Are My Options

Offering a higher security deposit can improve your chances when asking, 'Can I rent an apartment with bad credit?' Here are a few other solutions available for you to consider. 

1. Be honest. 

Don't let your landlord discover your history on their own. Come straight out and explain what happened. Was it an unexpected job loss? Medical bills? Life happens! Landlords appreciate it when you are up front with them and can demonstrate how you've turned your finances around.

2. Offer extra money for your security deposit. 

If you can offer 2-3 months' worth of rent as a security deposit, some landlords will take the chance and rent to you. This guarantees that they can at least get some money back if you end up skipping town. Check your state's law before offering this, as not all states allow it.

3. Provide proof of income. 

If you can show that you earn enough money to comfortably pay rent each month, some landlords will take that into consideration. Typically, landlords want to see that you make 3 times the monthly rent amount. Provide pay stubs, bank statements, tax returns, and anything that proves you can pay the rent each month.

4. Find a co-signer. 

If you have a family member or friend with good credit who is willing to co-sign your lease, that may convince a landlord to rent to you. A co-signer is someone who will take responsibility for the rent if anything were to happen to you. Make sure your co-signer is aware of what they're getting into.

5. Find a private landlord. 

Some apartments will deny you solely based on an automated screening process. This happens often with large apartment buildings. You may have more luck renting from a private landlord who can look at your situation individually.

6. Offer to pay rent upfront. 

If you're able to, offer to pay a couple of months' rent upfront. Not only will this show that you're serious about renting, but you'll also give the landlord some assurance that they'll be paid. Many private landlords will rent to you if you offer to pay a deposit.

7. Start building your credit. 

If you're not in a time crunch to find a new place, take some time to rebuild your credit. You'll want to pay down debts, dispute any inaccuracies on your credit report, and refrain from opening any new lines of credit. Any improvement will help.

Final Words

Renting can be an effective way to create long-term wealth if you know what you're doing. As a landlord, it's important to budget for both ongoing expenses and future capital costs. If you don't, you're setting yourself up for a surprise.

Renters with bad credit face real struggles. However, accepting that fact can open up options to help you get approved.