Real estate has always been a hot spot for investors, and is well-known to produce some of the wealthiest people in the world. However, it is always better to understand each and every aspect of your rental property investment before putting your money in.
Do you know the costs of owning different properties? Owning a property to live in is different than owning a one to rent. If you didn’t know that, I bet you wouldn’t know about the hidden costs of owning a rental property!
1. Down payment
The down payments for rental properties are higher than the normal owner-owned houses. Generally, the down payment for a normal house to live in is 20%, but it can be lesser. However, rental property requires at least 20% down payment, most commonly 25%. There will be an exception where you can have a down payment of lower than 20%, if the investment goal of your intended property is to become your second home.
2. Interest rate
For every property, the investor generally has to take out a loan or a mortgage to own it. As investment property loans are riskier, the interest rate for an investment real estate is generally higher than a traditional mortgage interest rate. It is usually higher than primary residences’ rates by at least 0.50% to 0.80%.
3. Property taxes
Every property has different taxes, as they all depend on the location it is on. Be sure to check with your municipality on the prices and what it includes. It is important to know the details to know what to add into your rental.
4. Landlord insurance
For rental properties, two types of insurance are generally bought: homeowner insurance and landlord insurance. The landlord insurance covers property damage, lost rental income, and offers protection for liability. This is an extra protection in case a tenant or a visitor gets hurt at your rented land. Landlord insurance is usually 25% more than the homeowner insurance.
If you are looking to lower your costs, you can consider asking if there is a way to combine your landlord insurance with your homeowner insurance policy.
5. Maintenance fees
As an owner of a rental property, you will have to pay and fix it if your tenant is not satisfied with the condition. All damages that occur – a leaking roof, burst pipes, and bathroom issues, will require a certain sum of money. You can consider putting aside 20% or 30% of your rental income to have a timely fix on your property.
It would be a great save if you are handy, and can fix up the damages by yourself.
6. Tenant search
Sourcing for a (hopefully right) tenant is hard and time-consuming, not to mention costly. You might have to hire a hiring agent or a property manager to help source tenants, if you are investing in real estate part-time. It is better to be selective when choosing tenants, as a bad tenant might damage your place and cost you to spend more.
To search for a good tenant, it is advised to do a background check on them and their credits. As we say, vacancy is less costly than renting to a bad tenant.
7. Vacancy fees
The best case scenario is that your rental property is extremely popular and it is never vacant. However, not every wish comes true. It might be because your tenant left and you have yet to find a new one, or it might be that the market is not doing well. Whatever the reason, it is always better to allocate a certain amount of money if that happens.
Comparison: Rental property vs Home-owned property
|Rental property||Home-owned property|
|Down payment||Minimum 20%||Can be below 20%|
|Insurance||Landlord + Homeowner||Homeowner|
|Maintenance fees||Higher – unexpected demands from tenant||Lower|
|Tenant search||Hire hiring agent & conduct tenant background check||–|
|Vacancy fees||You have to pay for all costs even if it is vacant||–|
Rental property may have more hidden costs, but if managed well, it can produce a high rental income. To understand fully the hidden costs of investing in rental property allows you to make wiser decisions, hence gaining higher income.
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