Buying rental properties is one of the best ways for an investor in Madison to build wealth. But unlike other types of investments, there are often substantial starting costs. Purchasing a Madison rental property is very capital-intensive. Even though good financing can help you defray some of the costs, it’s significant first to recognize what you are getting yourself into. The value of a rental property will vary from market to market, but there are some rental property costs that you can expect and prepare for no matter where it is.
The first thing most people ponder about when wondering if they can afford to buy a rental property is the price of the home itself. And it’s not a bad place to start crunching the numbers. To get a sense of which markets you might want to explore, it’s helpful to look at the median listing price for properties in your chosen area. For instance, 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 having an idea about the median house price in your market, you can get 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 need to plan for as a Madison investor. Some of the most common of these costs comprise of:
- Down Payment – Unless you’re paying cash for a property, you’ll need to plan to have enough money on hand for a down payment. Most conventional mortgages require between 10% and 25% of the purchase price.
- Closing Costs – The list of closing costs is long, extending from fees for everything from loan origination and attorney fees to appraisals, recording fees, and more. A good rule of thumb is to plan to pay between 2% and 5% of the purchase price.
- Property Taxes – Even if often unnoticed, property taxes are also an important item to include in your budget. Property taxes are based on the estimated value of the property. In most counties, you can find information on property taxes online.
- Repair and Maintenance Costs – Contingent on the condition your property is in when you buy it, you might need to fix it up before it’s ready for your tenants. It would help if you also planned 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 could be small or quite large, depending on the type of amenities the community offers.
- Property Management Fees – Many Madison investors prefer to have a trusted property manager, like Real Property Management Greater Madison Metro, take on the day-to-day tasks involved in owning a rental property. If this is your plan, it’s crucial 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 need capital improvements over the years, some larger than others. Make concrete plans for things that are considered as high costs, like a new roof or full window replacement, right from the start.
- Future Vacancies – No investor buys a rental property thinking it will sit empty for weeks or months, but it can and does happen. It’s important to include the costs of an unexpected vacancy into your total ownership costs.
- Cash Reserves – If buying that rental property will leave you flat broke, you possibly can’t afford it. It’s important to guarantee that you have some cash in reserve after finishing to avoid financial difficulties.
So, even if this list is by no means comprehensive, it does represent many of the major expenses. Some others might be things like insurance, legal fees, utility costs, real estate agent commissions, and so on. By making sure 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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