The first thing individuals usually think about when considering if they can afford to buy a rental property is the price of the home itself. And this is a good way to start crunching the numbers. To be aware of which markets you might want to explore, it is advisable to take a look at the median listing price for properties in your chosen area. For instance, 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 knowing the median house price in your market, you can get a better sense of which markets you might be able to afford.
While housing prices are a good place to start, there are many other rental property costs that you need to plan for as a Harlan Ranch investor. Some of the most common of these costs include:
- Down Payment – Unless you’re paying cash for a property, it is necessary to have enough money on hand for a down payment. Most conventional mortgages need to pay around 10% and 25% of the purchase price.
- Closing Costs – The list of closing costs is lengthy; it involves fees for everything from loan origination and attorney fees to appraisals, recording fees, and more. A good rule of thumb is to expect to pay between 2% and 5% of the purchase price.
- Property Taxes – Though often disregarded, property taxes are also an important item to include in your budget. Property taxes are computed based on the estimated value of the property. In several districts, you can find information on property taxes online.
- Repair and Maintenance Costs – Depending on the condition your property is in when you buy it, you might need to fix it up before it’s ready for your tenants. It would help if you were already preparing 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’ll have to factor monthly association fees into your total costs. These fees could be low or pretty big; it depends on the type of amenities the community offers.
- Property Management Fees – The majority of Harlan Ranch investors might want to have a trusted property manager, like Real Property Management Platinum, to supervise the day-to-day tasks involved in owning a rental property. If this is your goal, keep in mind to include the cost of the property manager’s fee in your budget. Depending on what company you want to work with, this fee could range anywhere from 8% to above 20%.
- Ongoing Capital Expenditures – All rental properties would require capital improvements over the years, some greater than others. Don’t forget to plan for high costs, including a new roof or full window replacement, right from the start.
- Future Vacancies – No investor buys a rental property thinking it will sit empty for weeks or months, but it can, and it really happens. It’s imperative 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. It’s vital to keep in mind that you need some cash in reserve after closing to avoid financial difficulties.
While this list is by no means comprehensive, it does represent many of the major expenses. Others might be things like insurance, legal fees, utility costs, real estate agent commissions, and more. By ensuring 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.
Would you like to know more about how to calculate rental property costs accurately? We can help! Contact us online or give us a call at 559-425-8550.