Down Payment
Of course, to buy a rental property, you need a cash down payment. If you already own a residence, most lenders might require a minimum of 20% down, or in some situations, as much as 30%. If the property you want to buy is your very first purchase, you may be able to get a conventional loan with 15% down. This is the absolute minimum required under Fannie Mae. The usual scenario is that a lender will lend you only up to 75% of the property’s purchase price. You then have to come up with a down payment of about 25%.
Closing Costs
Aside from the down payment, you also need to have cash available to pay closing costs. These costs can range from loan origination fees, appraisal and home inspection fees, mortgage insurance, title insurance, deed recording fees, property taxes, and notary fees. You must remember that closing costs on an investment property could be more than what you’d expect to pay for a primary residence. Experts recommend anticipating closing costs of between 3% and 5% of the purchase price.
Renovation Costs
Closing on your first rental property investment is your official beginning to a new journey. After acquiring the property, you will need to spend to get the property ready for your first tenant. This is true even if your rental home is new or in very good condition. The renovation and repair costs will depend on the state of your property. However, most investment properties need a minimum of new paint, new carpeting, and getting the major systems inspected and serviced.
Operating Expenses
Once your property is prepped and ready to go, you should expect a few more initial expenses. These are called “operational” expenses since these things are part of the regular operation of your rental property. For example, you’ll need to photograph and market your property, pay for background checks on applicants, prepare good quality lease documents (typically with the assistance of an attorney), set up accounts to hold the security deposit and rent payments, and so on. A budget that includes both fixed and variable property expenses is also important since you may start paying for these before you get your first rent payment. On its own, these expenses aren’t exactly large, but they do add up. This is why it is wise to have enough cash set aside if you want to launch your rental property efficiently.
You may want to think about the advantages of hiring a good Lexington property manager to handle the many tasks a rental property requires. Unlike what most people tend to wrongly believe, property managers can actually save money for you since they provide a lot of the convenience, tech, and services you would otherwise still pay for. They can also handle the maintenance calls as well as tenant relations. Contact Real Property Management Commonwealth today to learn more about how professional property management can help you get your investing career off to a great start.