Buying rental properties is one of the best ways for an investor in Federal Hills to build wealth. However, unlike other types of investments, there are often substantial starting costs. Acquiring a Federal Hills rental property is very capital-intensive. Although good financing will allow you to defray some of the costs, it is a good thing to know what you are getting yourself into. The value of a rental property will vary from market to market, though there are a few rental property costs that you can expect and prepare for no matter what it is.
The first thing that most individuals fear when wondering if they can afford to buy a rental property is the price of the home itself. And it’s not a bad idea to start crunching the numbers. If you want to comprehend which markets you might want to explore, it will be useful to check the median listing price for properties in your chosen area. Let’s say, buying a rental property in New York City, New York, can easily run over a million dollars, while the median home price in San Antonio, Texas, is less than $300,000. By understanding the median house price in your market, you can get a better sense of which markets you might be able to afford.
Even though housing prices are a good place to start, you have to consider many other rental property costs as a Federal Hills investor. Some of the most important costs are:
- Down Payment – Unless you’re paying cash for a property, you need to plan to have enough money on hand for a down payment. The majority of conventional mortgages require roughly 10% and 25% of the purchase price.
- Closing Costs – The list of closing costs is complicated, includes fees for everything from loan origination and attorney fees to appraisals, recording fees, and more. A good rule of thumb is to plan to pay around 2% and 5% of the purchase price.
- Property Taxes – Although often neglected, property taxes are also an important item to include in your budget. Property taxes are determined by the estimated value of the property. In most districts, details for property taxes are available online.
- Repair and Maintenance Costs – Depending on the condition your property is in after you purchase it, you might need to fix it up before it’s ready for your tenants. It would help if you also planned for ongoing repair and maintenance costs, which are often around 5% of the property value annually.
- Association Fees – If your property is subject to an Owner’s Association or a different governing board, you must factor monthly association fees into your total costs. These fees could be low or pretty high, depending on the type of amenities the community offers.
- Property Management Fees – Most Federal Hills investors choose to have a trusted property manager, like Real Property Management Metro, to do the day-to-day tasks involved in owning a rental property. If this is your intention, it is advisable to include the cost of the property manager’s fee in your budget. Depending on who you recruit, this fee could range anywhere from 8% to above 20%.
- Ongoing Capital Expenditures – All rental properties will demand capital improvements over the years, some larger than others. Don’t forget to plan for high costs, like a new roof or full window replacement, right from the start.
- Future Vacancies – No investor buys a rental property believing it will sit empty for weeks or months, but sometimes it can happen. It’s essential to include the costs of an unexpected vacancy into your total ownership costs.
- Cash Reserves – If buying that rental property will make you flat broke, you probably can’t afford it. You need to make sure that you have extra cash in reserve upon closing to avoid financial difficulties.
Although this list is by no means comprehensive, it does represent many of the major expenses. Some of them might be things like insurance, legal fees, utility costs, real estate agent commissions, and on and on. By guaranteeing that you have all expenses accounted for, you can make smart investment decisions that will help safeguard the profitability of each rental property for years to come.
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