The first thing many people worry about when thinking if they can afford to buy a rental property is the price of the home itself. And it’s a good idea to start crunching the numbers. To get a sense of which markets you might want to explore, it’s practical to search the median listing price for properties in your chosen area. For example, 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 assume for as a Manchaca investor. Some of the most common expenses are:
- Down Payment – Unless you’re paying cash for a property, you should plan to have enough money on hand for a down payment. In many conventional mortgages, you have to expect between 10% and 25% of the purchase price.
- Closing Costs – The list of closing costs is wide, varying 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 charge anywhere from 2% and 5% of the purchase price.
- Property Taxes – While mostly unnoticed, property taxes are also an important item to include in your budget. Property taxes are calculated on the estimated value of the property. In some 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, you must fix it up before it’s ready for your tenants. It will also help if you 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 high; it is measured by the type of amenities the community offers.
- Property Management Fees – Many Manchaca investors choose to hire a trusted property manager, like Real Property Management Alamo, to perform the day-to-day tasks involved in owning a rental property. If this is what you want, make sure 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, some larger than others. Make sure to prepare for high costs, such as a new roof or full window replacement, right from the start.
- Future Vacancies – No investor buys a rental property assuming that it will sit empty for weeks or months, but it can and will occur. So you must include the costs of an unexpected vacancy into your total ownership costs.
- Cash Reserves – If buying that rental property will make you flat broke, it is clear that you can’t afford it. For this reason, ensuring that you have cash in reserve after closing is necessary to avoid financial difficulties.
Although 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.
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 210-600-5672.