Buying rental properties is one of the best ways for an investor in Smithtown to build wealth. But in contrast to other types of investments, there are often substantial starting costs. Obtaining a Smithtown rental property is very capital-intensive. Although the right financing can help you defray some of the costs, it’s significant first to know what you are getting yourself into. The value of a rental property will vary from market to market, yet there are some rental property costs that you can expect and prepare for no matter where it is.
The first thing a lot of people think about when asking if they can afford to buy a rental property is the price of the home itself. Plus, it is not a bad move to start crunching the numbers. To see which markets you might want to explore, it’s recommended to visit 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 knowing the median house price in your market, you can acquire a better sense of which markets you might be able to afford.
Even though housing prices are a good place to start, there are many other rental property costs that you have to organize for as a Smithtown investor. Some of the most common of these costs include:
- Down Payment – Unless you’re paying cash for a property, you’ll need to prepare to have enough money on hand for a down payment. Several conventional mortgages require somewhere in the range of 10% and 25% of the purchase price.
- Closing Costs – The list of closing costs is long, ranging from fees for everything from loan origination and attorney fees to appraisals, recording fees, and more. A good rule of thumb is to prepare to compensate somewhere around 2% and 5% of the purchase price.
- Property Taxes – Although regularly ignored, property taxes are also an important item to include in your budget. Property taxes depend on the estimated value of the property. In many areas, you can locate information on property taxes online.
- Repair and Maintenance Costs – Depending on the condition your property is in before you acquire it, it is important to fix it up before it’s ready for your tenants. It would be best if you were already preparing 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’ll have to factor monthly association fees into your total costs. These fees might be little or quite high, contingent upon the type of amenities the community offers.
- Property Management Fees – Lots of Smithtown investors choose to employ a trusted property manager, like Real Property Management Landmark, to perform the day-to-day tasks involved in owning a rental property. If this is your intention, you need to include the cost of the property manager’s fee in your budget. Depending on who you hire, this fee could range anywhere from 8% to above 20%.
- Ongoing Capital Expenditures – All rental properties will require capital improvements over the years, some of that is costly compared to others. Make sure to get ready for high costs, such as a new roof or full window replacement, right from the start.
- Future Vacancies – No investor buys a rental property expecting it will sit empty for weeks or months, but yes, it does happen. That’s why it is imperative to include the costs of an unexpected vacancy in your total ownership costs.
- Cash Reserves – If buying that rental property will cause you to be flat broke, then you can’t afford it. It’s necessary to secure some cash in reserve after you close the deal to avoid financial difficulties.
While this list is by no means comprehensive, it does represent many of the major expenses. Others might be things like insurance, legal fees, utility costs, real estate agent commissions, etc. By ensuring 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.
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