How much does it actually cost to buy a rental property?

14 Replies

Hello, I am a 20 year old that is planning on acquiring my first rental property sometime this year.  At first I thought that saving up $5,000 would suffice, but after working at a real estate development company this summer as an intern I am worried that my target is too low.  

To back up a step, my goal is to buy a one family home at around $50,000 that is close to move in ready that would generate a couple hundred dollars of cash flow a month.  I thought that a 10% down payment would be enough, so I set my savings target at $5,000.  

Now I am thinking that I should save up extra money for closing costs such as inspection, lawyer fees, and a title search.  Also, minor renovations, possible vacancies, etc.

How many of these fees do I actually need to worry about and what are your recommendations for a good amount of money to save before I invest?

Thank you for your replies in advance! 

For an investor property you should assume a minimum of 20% down. You might be able to do 15%, but that will incur PMI and increase your monthly payment more than just the difference in the down payment. In addition you will have a number of up front and closing costs:

inspection

utility turn on fees

appraisal

title company fees

legal fees

recording fees 

lender's title policy

origination fees and charges for the loan

prepaid insurance (typically 14 months insurance)

tax escrow

I'd typically estimate these all at about 2% of the purchase price.  But with a low priced house like this it will be more because many of them are fixed amounts.  $3000-4000 total, at a guess.

You will also need cash in the bank in addition to these. Typically six months PITI. If you're going to own rentals, having cash reserves is ABSOLUTELY essential to avoid disasters. I recommend a minimum of six months rent.

@Rudy Cecere  

welcome to the site.

Looking at your price point assuming a good income & FICO I think you would be ready to go with 15-20k. 

Thank you very much for your quick responses! This website is absolutely amazing and I can tell tell I will be on here for a very long time to come.  As for your advise, I believe that you are both correct that I should have a cushion and account for the worst.

But at that amount it may take a lot longer for me to close on my first property than I expected. On the bright side it will give me more time to research the ins and outs of REI and create a complete business plan.

If anyone else has advise on how to start with less money I would love to hear it.

@Rudy Cecere you still may need more than $5k but another option could be an owner occupied multi-family property. In some cases you can put down as little as 5% plus closing costs, etc. I'd say $10k total may get this done and leave a little left. Then you have a place to live with someone else paying your mortgage. You will be able to safe up for the next one much faster now.

Talk to some local lenders and go in prepared with some current multi family properties for sale to reference.

Jed, thank you for your response that is an interesting point...but i thought that loans for multifamily houses (up to 4 units) are treated the same as a single family.

Does the down payment amount get reduced because it is owner occupied? 

In my experience you can get a 5% convetional for owner occupant properties singles and duplexes. 20% conventional for single family non occupant and 25% convetional for multifamily non occupent. FHA is whole other ball of wax with 3.5% down for single and multi up to four units with owner occupancy. I hace heard of people getting less than 3.5% down as well with FHA. You can get 10% non occupant loans through homepath as well.

I am in the process of saving up for another property in your same price range. I am paying for a non occupant property. It can be difficult to get a conventional loan under 50k. I would reccomend finding local community banks and credit unions because they are more flexible with that. Personally I am saving up 25k. 10k for downpayment, 5k closing, 5k reserves, 5k repair costs.

As someone has already mentioned being an owner occupant of a small multifamily is a great way to get your feet wet with less funds.

You can get an owner-occupied FHA loan on a multifamily with 5% down.

What others have said about adequate cash reserves still applies, though. 

Great advice from others reducing up front costs by going owner occupant.

That is a good way to get your foot in the door.

Also consider that in the price range you're considering, (after the actual purchase), chances are there will be plenty of fix-up work to do. Even if it's just a coat of paint & cleaning the carpet, that all costs money. If there's a plumbing or electrical problem/upgrade, those guys don't work for free, either.

Make sure you have the cash to get the place fixed up to area market standards, make it safe/up to code & have cash on hand for the ongoing little problems & fixes that will ALWAYS happen.

Thank you everyone for your responses, it definitely helps reduce the amount of time I have to research to find the answer to a questions such as this!

As for everyone that is talking owner occupancy, how long do you have to live there?

I've heard several months, but does anyone know the official time?

Thank you in advance for your responses!!

One other recommendation is to look into creative financing and other people's money

You must live there a year for an owner occupant. I would still

Save up at least $10,000 even as an owner occupant and more with 20% down loan. 

I bought a rental last year for 40000 all In I paid approx 13000 which is 25 percent down and closing cost. Stick with your plan it will just take a little longer.

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