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How Much Money Do I Need to Start Investing in Real Estate?

Miniature House on a Pile of CoinsInvesting in single-family rental properties, when done correctly, is one of the best ways to build real wealth, as well as a good way to escape the daily grind. Since the majority of us don’t have million-dollar trust funds or wealthy sponsors, coming up with the money to start your first rental property can be a real challenge. The good thing is that you can take on this challenge with the right information and careful planning. Let us see how much money you would need to prepare in order to buy your first Mililani rental property.

Down Payment

First of all, you need to have a cash-down payment for your rental property. If you already own a residence, most lenders might require a minimum of 20% down, or in some situations, as much as 30%. If this is your very first property purchase, you might be able to get a conventional loan with 15% down. This is the absolute minimum required under Fannie Mae. The more typical scenario is that a lender will only let you borrow up to 75% of the property’s purchase price, which means you have to come up with a down payment of about 25%.

Closing Costs

You also need to have cash available to pay closing costs in addition to a down payment. These costs can range from loan origination fees, appraisal and home inspection fees, mortgage insurance, title insurance, deed recording fees, property taxes, and notary fees. Closing costs on an investment property are often much higher than what you’d pay for a primary residence. Experts recommend anticipating closing costs of between 3% and 5% of the purchase price.

Renovation Costs

Closing on your first rental property investment means the beginning of a lot more things. Once the property is yours, you will then incur costs to get the property ready for your first tenant. This would still be true for rental homes that are new or in very good condition. The renovation and repair costs will be different depending on the state of your property. However, most investment properties need a minimum of new paint, new carpeting, and getting the major systems inspected and serviced.

Operating Expenses

Once your property is prepped and ready to go, you should expect a few more initial expenses. Since they include things that form part of regular operations of a rental property, these can be called “operational” expenses. For example, you’ll need to photograph and market your property, pay for background checks on applicants, prepare good quality lease documents (typically with the assistance of an attorney), set up accounts to hold the security deposit and rent payments, and so on. You also need to make a budget that includes the fixed and variable property expenses, most of which you may need to start paying for even before you get your first rent payment. While on their own, these expenses are not large, they can still add up. This is why it is wise to have enough cash set aside if you want to launch your rental property efficiently.

You may want to think about the advantages of hiring a good Mililani property manager to handle the many tasks a rental property requires. Contrary to common belief, property managers can actually save you money through the conveniences, tech, and services you will have to pay for anyway. They also take the burden of maintenance calls and tenant relations off your shoulders. Contact Real Property Management Alliance today to learn more about how professional property management can help you get your investing career off to a great start.

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