Are you interested in buying an investment property or the surrounding areas? Before you agree to purchase, take an inventory of all the expenses you are likely to encounter. In our latest post, we will explore some of the costs you can expect when buying an investment property.
Buying an investment property is a great way to increase your income. However, it is important to be prepared for your purchase by understanding all associated costs. Below we cover a few of the different types of expenses with a general idea of what you can expect to pay.
Investment properties are not eligible for FHA loans unless you are buying an owner-occupied property with 1-4 units. If you are not planning on living in the home yourself, you will likely need to use a conventional loan, which will require about 20% down. The larger down payment you are able to make, the less interest you will need to pay in the long run. If you are able to pay in cash, even better. You’ll eliminate interest expenses and likely be preferred over buyers who require financing. Paying in cash will allow for a quick closing and lower the odds of the sale falling through due to a low appraisal.
Typically, closing costs will run you about 2-5% of the final sale price. Closing costs will include things like title search, title insurance, transfer fees, legal costs, and administrative fees. Buyers aren’t always prepared for these additional costs, so make sure you have budgeted ahead of time. You can also negotiate with the seller who will pay what, possibly arranging for them to cover the costs of closing completely on their own.
You may be able to handle one or two properties on your own if you know what you are doing and live nearby. But once you find yourself owning a few properties or properties out of the area you live, it will likely be time to bring in a property manager to help you with some of the associated tasks. Your property manager can help schedule repairs, handle tenant complaints, and be responsible for collecting the rent. In exchange for their services, you can expect to pay around 10% of the amount you are collecting in rent each month. That said, the right property management company can be worth their weight in gold.
Depending on where you live, property taxes can become a big factor when it comes to calculating your profits. Make sure you know the tax history of the property and any local changes that will affect the amounts you are paying in the coming years. You can look up the tax history on the property appraisers site and even sites like Zillow. Use a property tax estimator to find out what you might be in for in the upcoming year. If your margins are slim and you are stuck with a property tax bill costing thousands of dollars, the property may not be the right one for you. Don’t get hit at the end of the year with a high tax bill simply because you failed to research ahead of time.
The insurance you carry for investment property will be different than your standard homeowner’s insurance policy. It is recommended that you carry $500,000-$1,000,000 in liability coverage. The policy will likely be more expensive than what you pay for your own home. It is important to make sure you have landlord protection in case you are ever sued by a tenant or someone else in regards to the property. When adding up the costs for the home, don’t neglect to include your insurance expenses.
Maintenance & Repairs
Maintenance and repairs should never be overlooked when considering the true costs of your investment property. A good rule of thumb is to budget 1% of the properties value for the minor repairs needed each year. You’ll also want to set up an emergency fund for the larger repairs that will be needed over time. You’ll want to have the money available if something major breaks or for when you require a new roof, etc.
While this might be an area where you feel you can save a few bucks using your good ol’ intuition, now is not the time. It is extremely important to conduct full background checks on every person applying to live in your property. Even if you already know them, and even if they are a friend or family member. Many landlords find themselves stuck with bad tenants all because they didn’t spend the time to fully check them out. Many hassles and expenses can be avoided with a fast and thorough background check.