It’s always a big decision as to whether or not you should delve into the real estate market. Some say property is one of the safest ways to invest your money, but what kind of rental will give you the best returns?
One option on the table could be a luxury rental property. Owning such a property or apartment building will allow you to rake in a steady monthly income, of course. Plus, scooping up a high-end build will also diversify your portfolio — a luxury rental would react differently to shifts in the housing market, potentially saving you in case of an economic downturn.
Still, you’re on the fence because you’re unsure of the cost involved. How much does it cost to buy and maintain a luxury property? Here’s what you’ll want to calculate before signing the mortgage paperwork on your new real estate investment.
1. Purchase Price of the Property
A luxury property will likely cost more than the average home or apartment to purchase upfront unless you’re putting in thousands of dollars for renovations. Remember that location is key. For a luxury property, it’s best to choose a property that’s in a prime spot and invest in its appearance, for this will help guarantee success over time.
Before you decide to buy a rental property, conduct a careful investment analysis to ensure that the high-end rent will offset these costs. The national average for renting such a place is around $1,600, although different cities can see that swing wildly in both directions. For instance, Oklahoma City’s high-end properties bring in about $1,024 each month in rent, while Manhattan’s make more than $4,000 in the same timeframe.
Your future luxury-rental tenant will expect the best from a more expensive property. So, depending on the city, your real estate investment might come with a high purchase price off the bat. In other locations, though, you might have the option to flip a house you buy at a lower rate, making it luxurious enough to command the higher price tag you seek. Then, the income will start to flow.
2. Cost of Upgrades
Now that you’ve pinpointed a home or apartment building in the right neighborhood, you’ll want to consider the upgrades your rental property needs. The high-end renter indeed expects the best, since they will be paying top dollar.
In general, potential tenants will fall in love with your luxury rental property if it looks and feels new, even if part of a property’s appeal is its old-school charm. You should concentrate your efforts on the areas in which people want the most modern amenities — the kitchen and the bathroom(s), specifically. These areas make a significant impact on buyers.
Again, you won’t be outfitting a luxury pad with base-level materials and fixtures. So, you’ll have to consider the costs of the high-quality resources and labor you’ll be relying on. For example, luxury granite or quartz countertops will be a must in your rental property, costing around $45 to $75 per square foot. And a full set of stainless steel appliances will run you at least $2,500.
The price of a bathroom remodel will vary wildly depending on your choice of appliances, accents, and reliance on professional labor. A full bathroom remodel should cost at least $15,000, including a high-end shower and nice flooring and bath tile.
Of course, your actual expenses on luxury rental renovations will depend on your priorities and the budget you create with the help of a contractor. If you need help making choices when upgrading your place to luxurious standards, don’t hesitate to read up on this year’s design trends. Your pool of renters will be expecting the best — and you can woo them by offering what’s in right now.
3. Maintenance Costs
You won’t just hand over the keys and start raking in cash once you’ve got a luxury rental property in your real estate investment portfolio. Instead, you will have to set aside a portion of the rent to cover monthly expenses associated with the investment property. Operating expenses tend to take anywhere from 35 to 80 percent of the gross income you make from your rental. Don’t underestimate how much this can cost, as setting aside too little cash can leave you empty-handed when a significant expense crops up.
On top of that, many fancier buildings in which you can rent a luxury property will have homeowner’s association fees to take care of the building, too. You have to factor these into the rental price, as well as your expenses — sometimes, these fees can run into the thousands of dollars if the building has a slew of amenities, like coveted city parking, 24-hour security, etc.
You might also consider handing your property over to a management company, who will cover all the day-to-day operations for you. In most cases, you’ll still make a profit on your rental, but you’ll have to pay the person you hire, so keep that in mind. To that end, don’t forget to factor in the cost of your annual taxes, as well as the insurance you need to protect your luxury home.
Investing in Luxury Real Estate
There’s no formula for tallying up precisely what it will cost you to buy and run a successful luxury rental property. Each market, neighborhood and even building will be different. The best you can do is research all your options, study up on potential expenses, and whip out your calculator when you need it. In the end, your intuition and a critical look at your finances will help you decide if the investment property is worth it to you and your growing portfolio.
This article has been contributed by Holly Welles from The Estate Update.