Even as home prices and
rise, there are still bargains available for borrowers looking to
purchase rental properties.
According to the National Association of Realtors' 2013
Investment and Vacation Home Buyers Survey, investment-home
purchases accounted for 24 percent of all sales in 2012, the second
highest mark since 2005.
"Investors have been very active in the market over the past two
years, attracted mostly by discounted foreclosures that could be
quickly turned into profitable
," Lawrence Yun, NAR chief economist, said in a statement.
While rental properties are certainly appealing, offering the
promise of monthly cash flow in addition to long-term appreciation,
investment properties have a number of costs that are both visible
and hidden, says Michael Whitbeck, real estate investor and founder
of Residential Mortgage Underwriting and Processing Institute, a
mortgage underwriting training firm in West Bloomfield, Mich. Even
the most obvious expenses, like the
monthly mortgage payment
, might pack a few surprises.
Before you start searching for rental properties, run the
numbers to understand whether investing in a rental property will
be a windfall or a money pit.
8 rental costs to consider
No. 1: Mortgage requirements
Investment properties are considered riskier because the home is
not your primary residence. Whitbeck says you should expect to pay
roughly 1.5 percent more than the
you see advertised. The down payment requirements for a fixed and
adjustable 1-unit structure would be about 15 percent and 25
percent, respectively. If 2 to 4 units, those down payment
requirements jump to 25 percent and 35 percent, respectively, says
Whitbeck. Furthermore, if your credit score is less than 720,
expect to pay even more.
No. 2: Property taxes
Depending on where you purchase, property taxes can add
significantly to the property cost, says Whitbeck. Be sure to
contact the municipality directly to ensure that the taxes listed
on the Multiple Listing Service are accurate. It's also a good idea
to find out what services those taxes include. For example, does
that include garbage removal?
No. 3: Homeowners insurance
Nat Kunes of AppFolio, Inc., a property management software
company in Goleta, Calif., warns that insurance can vary
significantly depending on your region, especially if your home is
located in an area prone to flooding, fires or other perils. Be
sure to discuss rates with an insurance representative prior to
entering a contract on the property.
No. 4: Maintenance
Charleston, S.C., landlord Lin Bennett keeps a pool of money
equal to about $100 per month per property on hand in case she
needs to repair one of her seven rental units. Whitbeck says it's a
good idea to budget 10 to 15 percent of the annual property rent
for maintenance and upkeep of the property, in addition to any
tenant-caused damage that should be covered by security
"To get the maximum value of your property when you want to sell
it, you're going to have to keep it in good condition," he
No. 5: Association fees
Some condominiums and homeowners associations have monthly fees
associated with them. These also need to be included in your
budget. In addition, warns Whitbeck, if the unit is part of an
association, be sure there are no rules against rentals.
No. 6: Utilities
While utilities like gas and electric are often the
responsibility of the tenant, some services, like water and sewer,
might be included in the rent. If you plan to include utilities in
your rental price, get an estimate from the utility companies of
the average monthly usage.
No. 7: Tenant search
Finding good tenants also carries expenses. Bennett charges
prospective tenants a nonrefundable $35 application fee to be
considered for her properties to defray that cost. Hiring a
property manager or real estate agent to handle the search for you
will carry an additional cost that varies considerably by
No. 8: Vacancy allowance
Whitbeck also warns landlords not to assume the house will be
rented 12 months out of the year. He advises allowing two months of
vacancy, if possible, when setting rents. Bennett doesn't do that,
however, since she owns properties in a "very tight rental market"
and has always been able to rent her units within 30 days of
showing them. It's essential to understand your market to
understand how long rental properties typically stay on the
If you've tallied up these expenses and you're still in the
black, a rental property might be a good investment. Budget
carefully and stay on top of rent collections to ensure your
property pays off.