Some areas, particularly condo complexes or higher-income neighborhoods, are governed by a homeowners association (HOA), typically managed by community members. These HOAs establish rules and regulations regarding property use within their jurisdiction and may offer services and shared amenities, such as pools and roofs (for condos). HOA fees can vary significantly, ranging from a few dollars to thousands of dollars per month, depending on the community or location. Ensure you verify if your property is within an HOA and ask your real estate agent about the monthly HOA fees.
In the beginning, however, you’ll likely need to pick up the phone and make some calls to the electric company, water department, and garbage collections. They may not give you specifics for your property, but they can offer some pricing guidance.
How much does a local property manager charge to manage the property each month? This number is usually expressed as a percentage. This rate may differ based on location and property type, but typical rates hover between 7-12% of the gross monthly rent.
CapEx, short for capital expenditures, are the large less-than-frequent improvements done to a property such as roofs, parking lots, siding, or appliances. CapEx will depend on numerous factors such as property type, the location of the property, and the age of the property. Typically, many investors allocate between 5 and 15% of the rent for CapEx.
Vacancy rate is the cost of the property sitting empty due to tenant turnover. This number can vary depending on the area, so consult with a local property manager or landlord as to the local norms. Typical vacancy rates are between 3%-10% of the gross monthly rent, but again, that can depend on the area.
All properties require ongoing maintenance when things break (and with tenants – they will). This number is usually expressed as a percentage of the rent. Although repairs will depend on numerous factors such as the location and age of the property; typical repair costs tend to be between 5-15% of the gross monthly rent.
Insurance costs vary widely based on location, property type, and condition. To estimate your property’s insurance costs, consult with a local or online insurance agent for a quote. As you evaluate more deals in a particular area, you’ll develop a sense of what’s typical.
Remember that some areas require additional insurance, such as flood, hurricane, or earthquake coverage. Consult with your real estate agent, lender, or insurance agent to determine if you need these specialty policies. When requesting insurance quotes, be sure to inform the agent that the property is an investment.
The government generates a significant portion of its revenue from property taxes. Some regions have surprisingly low property tax rates (such as Denver), while others have exceptionally high rates (such as the Northeast). To find out your rental property’s taxes, you can use one of two methods:
The Listing: If a real estate agent lists the property, ask them about the current tax bill. This information is often available on online listings as well, such as Zillow.com or Realtor.com.
Public Data: In the United States, property tax information is publicly accessible. You can find current and historical tax records on your County Assessor’s website. Look for a section to search for “tax records.
Gross monthly income is the total amount of rent you could receive on the property if it is 100% occupied.
The loan term is the period over which the loan is to be repaid. A longer term results in lower monthly payments. In residential real estate, like single-family or small multifamily properties, 30-year mortgages are the most common, though many choose 15-year mortgages. In commercial real estate, 20 or 25-year mortgages are more typical.
When obtaining a loan, you often incur “points” (fees) on the loan amount. One point is equivalent to 1% of the loan value. For instance, on a $100,000 loan, 2 points would amount to $2,000.
When buying a rental property, most investors secure financing from a bank, credit union, or another lender. While down payment requirements vary due to several factors, most loans typically necessitate a down payment of 20 to 30% of the purchase price.
If you plan to rehab the property, you may increase its value depending on the extent of the renovations. If you’re making significant improvements, this calculator will need to know the new value—referred to as the after repair value (ARV)—to project future growth accurately. However, be aware that rehabbing a property does not always guarantee an increase in value. To ascertain the true value, consult a top-selling real estate agent in your area.
When buying a property, various costs and fees come into play. You can either input a single total amount here or use the advanced section to itemize closing costs by category. Generally, closing costs range from 1-2% of the property’s purchase price, but this can vary based on location and financing. If uncertain, using 1.5% of the purchase price is a reasonable estimate. Note that this 1-2% typically excludes lender points.