Investing in rental property is a great strategy for creating a passive source of income and building wealth over time. There is a wide range of residential property types that you could invest in including condos, single family homes, multifamily properties, and apartments. You could even choose to specialize in a niche like student housing or senior housing.
However, investing in rental properties is very capital-intensive. Unlike mutual funds and stocks where you can start investing with just a few hundred dollars, buying rental properties requires substantial capital. Therefore, before you start looking for a home to invest in, ask yourself “Can I afford to buy a rental property?”
So, how much do you need to buy a rental property? You can start to figure this out by looking at the median listing price for real estate in the city where you plan to buy an investment property. You can easily find this information online. Here is the median listing price for some major cities in the US housing market (according to Mashvisor’s data) to give you an idea:
- New York City, NY – $1,115,573
- Chicago, IL – $476,952
- Houston, TX – $444,683
- Phoenix, AZ – $431,544
- Philadelphia, PA – $355,124
- San Antonio, TX – $298,667
- San Diego, CA – $820,438
- Dallas, TX – $425,510
- Columbus, OH – $260,148
- Nashville, TN – $472,820
Besides the listing price, there are other costs that you need to keep in mind as a real estate investor. So, how much money do you need to buy a rental property? Let’s break it down:
1. Down Payment
When it comes to the payment method, you can choose between buying investment property with cash or mortgage. If you are not buying a rental property with cash, you will be required to pay a down payment. The amount will depend on the nature of the rental itself and the type of financing you are applying for. For instance, the down payment required for a traditional rental could be different from that required for a short-term rental. Generally, the down payment required for conventional mortgages is between 10% and 25% of the purchase price. Wondering how to invest in real estate with little money? Take out an FHA loan which requires a down payment for a rental property of only 3.5%. But you’ll have to live in the property while you rent it out.
Related: Where to Find Investment Property Loans with Low Down Payment
2. Closing Costs
Closing costs refer to all the expenses and fees connected to the settlement and closing of a real estate deal. Though the amount could vary greatly, it usually ranges between 2% to 5% of the purchase price. For example, if you are buying a $100,000 rental property for sale, you can expect to pay between $2,000 and $5,000 in closing costs.
Closing costs could incorporate a wide range of fees including:
- Loan origination fees
- Credit report fees
- Attorney fees
- Discount points
- Inspection fees
- Survey fees
- Escrow deposits
- Title search fees
- Lender’s title insurance
- Appraisal fees
- Recording fees
- Underwriting fees
3. Repair or Maintenance Costs
You might want or even need to spruce up your investment property before allowing new tenants to move in. Though the cost of repairs or maintenance will vary depending on the condition of your property, it could be anything between 2% and 5% of the property value annually.
Here are some of the things you need to consider when fixing up your new investment property:
- Window replacements
- Minor kitchen remodel
- Siding replacements
- Deck addition
- Flooring upgrades
- Insulation upgrade
- New roofing
- New front door
- New HVAC system
To minimize your costs, be sure to inspect the investment property thoroughly before signing on the dotted line. If the home is in very bad shape, ask the seller for a discount to cater for repairs or renovations.
4. Property Taxes
When wondering how much do you need to buy a rental property, property tax is one of the major costs to consider. The local government levies these taxes to help pay for projects and services that benefit the community such as roads, schools, libraries, and emergency services. Property taxes are calculated based on the estimated value of your property and the land on which it sits. Before purchasing an investment property, check its tax history to gain a better understanding of how much you’ll have to pay. Using Mashvisor’s investment property calculator, you can view the tax history for most listings. Try it out now.
5. Cash Reserves
When a financial institution gives you a mortgage, they expect you to have some cash in reserve after closing. This way, you can cover your initial mortgage payments even if you lose your job, can’t find tenants or face other financial difficulties. Most lenders require you to have a specific amount of money in cash. Such funds can be kept in safe and readily accessible places such as the money market fund, checking account, and savings account. Usually, lenders don’t allow real estate investors to use retirement assets as reserves.
The minimum level of reserves required will depend on factors such as your debt to income ratio, your credit score, your down payment, and the lender’s rules. Generally, lenders will require you to have six to twelve months’ worth of expenses in reserves.
6. Homeowners Association Fees
If you purchase income property in a planned community, you will probably be required to pay HOA fees. These fees basically cover services such as:
- Community amenities
- Water and sewer service
- Common area maintenance
- Trash removal
Homeowners Association fees are paid monthly, quarterly, or annually. The amount will depend on the services being offered and where the property is located. For example, if you buy a rental property in an up-market community with multiple amenities like tennis courts, gyms, walking trails, and a swimming pool, the monthly HOA fees could be $1,000 or more.
7. Property Management Fees
If you don’t have the time or experience to handle the day-to-day running of your rental investment, you will need to hire a professional property manager. The property manager will advertise the property, screen potential renters, prepare leases, facilitate move-ins, collect rent, handle tenant complaints, facilitate repairs, and even initiate eviction of non-paying or troublesome tenants.
The standard property management fee for traditional rentals is 8% to 10% of the collected rent. For example, if your rent is $2,000 per month, the property management fee will be $160-$200. Since managing a vacation home will require more from the hired manager, the fee could be up to 25% of the collected rent.
Closing Thoughts
Other costs of buying a rental property include utility costs, real estate agent fees, insurance costs, legal fees, and vacancy costs. Because there are a lot of different costs involved, you need an efficient way to estimate them all. Mashvisor’s rental property calculator can come in handy for this. This tool will estimate rental property expenses for any listing (MLS or off-market) based on rental comps. It will also give you a rental income estimate and calculate cash flow to ensure you find cash flow properties. Sign up now to start working out how much you’ll need to buy a rental property today.
Related: A Comprehensive List of Rental Property Expenses for Investors