Buying rental properties is one of the best ways for an investor in Windsor to build wealth. But unlike other types of investments, there are often substantial starting costs. Owning a Windsor rental property is very capital-intensive. Admitting that good financing can help you defray some of the costs, it’s crucial to understand first what you are getting yourself into. The value of a rental property will vary from market to market, but there are several rental property costs that you can expect and prepare for no matter what it is.
The first thing most people worry about when thinking if they can afford to buy a rental property is the price of the home itself. And it is ideal to start crunching the numbers. If you want to get an idea 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 understanding the median house price in your market, you can get a better sense of which markets you might be able to afford.
While housing prices are a good place to start, there are many other rental property costs that you need to organize for as a Windsor investor. Some of the most important of these expenses incorporate:
- Down Payment – Unless you’re paying cash for a property, it is necessary to have enough money on hand for a down payment. Most conventional mortgages need around 10% and 25% of the purchase price.
- Closing Costs – The list of closing costs is lengthy, including fees for everything from loan origination and attorney fees to appraisals, recording fees, and more. A good rule of thumb is to expect to pay approximately 2% and 5% of the purchase price.
- Property Taxes – While frequently overlooked, property taxes are also an important item to include in your budget. Property taxes are measured by the estimated value of the property. In several counties, you can locate details on property taxes online.
- Repair and Maintenance Costs – Depending on the condition your property is in when you buy it, you will have to fix it up before it’s ready for your tenants. It would be great to plan 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 must factor monthly association fees into your total costs. These fees could be low or pricey, depending on the type of amenities the community offers.
- Property Management Fees – Many Windsor investors prefer to get a trusted property manager, like Real Property Management Hartford Metro/Greater New London, who handles the day-to-day tasks involved in owning a rental property. If this includes your strategy, it’s vital to include the cost of the property manager’s fee in your budget. It often depends on who you employ; this fee could range anywhere from 8% to above 20%.
- Ongoing Capital Expenditures – All rental properties will require capital improvements over the years, and some are costly than others. Make sure to anticipate 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 does happen. For this reason, it is advisable to include the costs of an unexpected vacancy into your total ownership costs.
- Cash Reserves – If buying that rental property will make you flat broke, you definitely can’t afford it. Please ensure that you have some cash in reserve after closing 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, and many more. 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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