Buying rental properties is one of the best ways for an investor in Downey to build wealth. Yet, unlike other types of investments, there are often substantial starting costs. Obtaining a Downey rental property is very capital-intensive. Although great financing can help you defray some of the costs, it is ideal to understand first what you are getting yourself into. The value of a rental property will vary from market to market, but there are certain rental property costs that you can expect and prepare for no matter where it is.
The first thing many people worry about 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. In order to know which markets you might want to explore, it’s beneficial to review the median listing price for properties in your chosen area. In particular, 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 recognizing the median house price in your market, you can have a better sense of which markets you might be able to afford.
Although housing prices are a good place to start, there are many other rental property costs that you need to foresee for as a Downey investor. Here are some of the most common expenses:
- Down Payment – Unless you’re paying cash for a property, you need to prepare to have enough money on hand for a down payment. In many conventional mortgages, you have to compensate between 10% and 25% of the purchase price.
- Closing Costs – The list of closing costs is wide, ranging from fees for everything from loan origination and attorney fees to appraisals, recording fees, and more. A good rule of thumb is to expect to compensate around 2% and 5% of the purchase price.
- Property Taxes – While often overlooked, property taxes are also an important item to include in your budget. Property taxes are regularly based on the estimated value of the property. In several areas, you can seek information on property taxes online.
- Repair and Maintenance Costs – Depending on the condition your property is in when you buy it, it is necessary to fix it up before it’s ready for your tenants. It is also important to prepare 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 other governing board, you have to factor monthly association fees into your total costs. These fees could be minimal or very expensive; it depends on the type of amenities the community offers.
- Property Management Fees – Almost all Downey investors choose to have a trusted property manager, like Real Property Management Southland, to organize the day-to-day tasks involved in owning a rental property. If this is what you prefer, it is necessary to include the cost of the property manager’s fee in your budget. It depends on which company you hire; this fee could range anywhere from 8% to above 20%.
- Ongoing Capital Expenditures – All rental properties will need capital improvements over the years, and some are higher than others. Make sure to prepare for high costs, like a new roof or full window replacement, right from the start.
- Future Vacancies – No investor buys a rental property thinking that it will sit empty for weeks or months, but it does and will happen. That is why you need to include the cost of an unexpected vacancy in your total ownership costs.
- Cash Reserves – If buying that rental property will make you flat broke, it is evident that you can’t afford it. For this reason, it is important that you have cash in reserve after closing is necessary to avoid financial difficulties.
While this list is by no means comprehensive, they do represent many of the major expenses. Some could be things like insurance, legal fees, utility costs, real estate agent commissions, and many more. By making sure 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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