Investment in rental properties offers a rewarding passive income source for anyone who wants a ticket to financial freedom.
It is one of the very businesses where you can predict your ROI accurately. Yet, investors tend to lose money in this business.
This is primarily because investors tend to lack understanding about the actual costs of owning a rental property.
Well, not anymore. If you are wondering how much does it cost to start a rental property, this article is for you.
From helping you understand the different costs associated with owning and running a rental property to helping you get a rough approximation of each—this article covers everything.
Let’s dive right in.
What is the cost of starting up a rental property?
It takes an average of $68,000-$391,000 to start a rental property in the US. These costs are largely influenced by factors such as the cost of property, downpayment, remodeling, insurance, property taxes, and legal fees.
In terms of profitability, rental property owners generally earn a 7-8% ROI on their investment. However, it’s quite easier with appropriate planning and financing to earn anywhere from 15-20% ROI.
Average costs for starting a rental property
Before we dive into details, check out this rental property startup cost checklist. It will help you plan your startup budget and know how much financing you need to get started.
| Item | Average Cost |
|---|---|
| One-time Expenses | |
| Down payment | $50,000-$300,000 |
| Remodeling | $5,000-$50,000 |
| Brokerage fees | $2,500-$4,000 |
| Legal and other fees | $500-$5,000 |
| Home inspection fees | $250-$500 |
| Appraisal fees | $300-$700 |
| Property insurance | $1,500-$2,000 |
| Website | $300-$1,500 |
| Property Photography | $200-$3,000 |
| Open house | $300-$2,000 |
| Business plan | $150-$200 |
| Total One-Time Expenses | $61,000-$368,900 |
| Recurring Expenses (Per Month) | |
| Mortgage | $6,000-$20,000 |
| Utility bills | $50-$200 |
| Maintenance costs | $150-$350 |
| Property tax | $250-$350 |
| Accounting fees | $250-$500 |
| Property taxes | $150-$250 |
| Marketing | $150-$1,000 |
| Vacancy costs | $100-$150 |
| Total Recurring Expenses | $7,100-$22,800 |
| Total | $68,000-$391,000 |
Using this rental property startup cost checklist, you can plan your startup budget and get an idea of how much financing you will need
How to calculate the cost of starting a rental property
You now have a list of potential expenses and a rough estimate of your startup costs. Let’s estimate your actual startup costs using these two proven methods.
The first, traditional method involves using a startup costs worksheet to estimate the startup costs. However, the second, the Upmetrics method, is an innovative method that uses the Upmetrics financial forecasting tool.
Let’s understand both methods so that you can choose one that suits your requirements the best.
The traditional method—startup costs worksheet
The startup costs worksheet helps you calculate the amount needed to take your business off the ground. It is a comprehensive list of fixed and recurring costs to help you determine the actual cost of starting a rental property.
Remember that many startup costs fall under recurring expenses, so cover those costs monthly, quarterly, or annually.
This cost worksheet helps you estimate the funding required to get your startup costs covered.
Calculate your startup costs using this worksheet.
The Upmetrics method—financial forecasting tool
It is an intuitive and efficient method of calculating startup costs. Using Upmetrics will not just help you estimate startup costs but also help with financial forecasting.
All you need to do is enter your sales, costs, and other financial assumptions and let the tool calculate monthly/quarterly/ and yearly projections for you.
Check out the financial forecasting tool for accurate financial forecasting.
Pro-tip
Check out the financial forecasting tool for accurate financial forecasting. Once you have an accurate estimate of startup costs, you can easily identify funding requirements for your gas station.
Raising funds for a new startup is certainly a nerve-wracking and time-consuming process, but having a solid rental property business plan can make things a lot easier.
Once you accurately estimate startup costs, you can easily identify funding requirements for your rental property.
Raising funds for a new startup is nerve-wracking and time-consuming, but having a solid rental property business plan can make things much easier.
Let’s move ahead and discuss the factors that affect your rental property start-up expenses.
Factors that affect rental property startup costs
Let’s discuss the factors that influence the startup costs for your rental property.
1. Location and Property Purchase
Location plays a crucial role in determining the initial costs and operating expenses of your rental startup. It’s a no-brainer that prime locations with high demand come with higher property prices and intense competition.
That being said, the prices are heavily influenced by the state, city, and locality you choose.
Additionally, you will be required to put down 20-30% of the property value as a downpayment. This is especially the case if you are planning to rent the investment property right from the first day.
We can’t put a figure on the downpayment as the value depends on size, locality, and a lot many other factors. However, be prepared to pay at least $50,000-$300,000 or more as a downpayment for the property.
As another method, you get an owner-occupied loan for a 3.5% downpayment. However, you have to live in that property for 12 months to be eligible for FHA financing.
Now, whatever method you choose, the costs for a downpayment will take the largest share of initial capital requirements. Moreover, regular mortgage payments will add a significant amount to your rental property’s operating expenses.
2. Property Improvements and Utilities
Another prominent expense would be redecorating your rental properties to get them ready for lease. The expenses can vary significantly depending on how much work a particular property demands.
However, be prepared to spend anywhere from $5,000-$50,000 on modifications and redecorating. But keep a tab on expenses else your expenses would flare up pretty high.
As far as utilities are concerned, you will be required to get the connections. And while the tenant would be paying the utility bills, owners are required to pay for water bills and sewer. Keeping aside $50-$200 every month would be enough to cover these utility bills for each rental property.
3. Property Management and Maintenance Costs
Seasoned rental operators always budget for maintenance expenses even when there is no impending need. And while it may seem like an unnecessary bother, budgeting can help you meet unforeseen repairs effortlessly, without requiring you to break the bank.
As a thumb of rule, you should save at least $1 per square foot for your maintenance repairs every year. In fact, entrepreneurs with years of rental business save 10-15% of their annual rental income to meet unforeseen and planned maintenance repairs.
$2,000-$4,000 a year is a good budget to spare for expenses incurred on maintenance.
Now, is it essential to hire property managers?
It’s not compulsory, however, it is highly recommended given the benefits property management companies offer.
A property manager would help to find high-quality tenants, ensure shorter vacancy cycles, collect leases, assign maintenance, and look after overall compliance.
They charge approx 10% of your rent, accounting for nearly $250-$350 every month.
While hiring a property management company is expensive, a seasoned entrepreneur is likely to consider that as an investment to grow their business.
4. Professional and Compliance Fees
As a rental property owner, you will have to hire a few professionals to help with the management, compliance, and value appreciation of rental properties.
Brokerage fees
Brokers can help in finding a long-term renter for your property by undertaking tenant screening and credit checks. A broker may charge on a commission basis or a flat fee approximately ranging between $2,500-$4,000.
Legal and other fees
Compliance is quite crucial when it comes to rental properties. Legal professionals will help with acquiring business permits, reviewing rental agreements, ensuring compliance with landlord-tenant laws, and much more for an approximate fee of $500-$5,000.
Home inspection fees
Investment in real estate is a big deal involving thousands of dollars. Home inspection services evaluate the condition of a house and help identify mechanical failures, damage, and molds that are otherwise unknown to untrained eyes.
Home inspection may cost anywhere from $250-$500 depending on the property size and location.
Appraisal fees
Appraisal fees are paid to licensed professionals who determine the overall value of your property. Generally, these professionals are paid $300-$700 for inspection as a one-time fee.
Accounting fees
You can’t manage everything on your own, especially when there are tons of operating expenses associated with rental properties. An accountant can look after the figures and help you evaluate the actual financial feasibility of your property. Depending on the expertise and services offered, you can expect to pay anything from $250 to $500 monthly.
5. Property Insurance and Property Taxes
You will require property insurance for your real estate. Now, this is generally included in your mortgage payments. However, if that’s not the case, you will have to get separate insurance costing you nearly $1,500-$2,000 annually.
Homeowners’ insurance costs comparatively cheaper, however, they offer insufficient coverage. In the case of rental properties, it is essential to look after insurance that offers coverage against theft, fire, calamities, and property damage.
Additionally, you need to account for property taxes while calculating start-up costs for this real estate business. The tax rate is decided based on your property’s assessed value and the prevalent rate in your jurisdiction.
However, you can keep aside $150-$250 as monthly costs for property taxes. Bear in mind, that these taxes are available for tax deductions.
All in all, nearly 10% of your monthly rent goes into paying for property insurance and taxes.
6. Marketing and Branding
Marketing is quintessential if you want your rental properties to perform well in the market.
First things first, you need a website that offers adequate information about you and your rental properties. The website will cost you around $300-$1,500.
However, you also need to consider paying photographers and videographers to get high-quality images and 360 views of your properties. This can cost anywhere from $200 to $3,000 depending on the skills and expertise of the hired professional.
Additionally, consider the expenses for content marketing, paid ads, brochures, flyers, newspaper ads, and other marketing activities. This will cost you anywhere from $150-$1,000 and sometimes even more.
Lastly, you also need to consider costing of hosting an open house to invite prospective renters for property viewing. This can range anywhere from a couple of hundred dollars up to a few thousand, i.e. $300-$2,000.
7. Vacancy Costs
Determine the vacancy rate for your rental property, i.e. how many months in a year would the property remain vacant?
The average vacancy rate in the US for rental properties is 5.8%. However, this may vary for your property depending on its location and price.
Now, the cost of vacancy will vary from property to property. However, to give you a rough approximation, budget anywhere from $100-$150 every month for your vacancy expense.
And those are pretty much all the expenses you will incur on starting a rental property. Let’s now learn some practical ways to reduce those expenses.
Tips for reducing rental property startup costs
While starting a rental property can be an expensive affair, here are some practical ways to bring down your overall start-up costs.
1. Start small
It’s a no-brainer. No need to invest in multiple rental properties at a time. Start with a single small property, get the work done on it, and start the rental. Make room for more rental properties as you gather enough financing and budget for them accordingly.
2. Regulate your remodeling costs
Remodeling can get pretty expensive. If you don’t have a well-mapped budget, you are likely to overspend which would result in eventual loss for your business.
Calculate the ratios and understand how much can you lease the property for before deciding your remodeling budget.
3. Avail government grants
Check if there are any government grants available for purchasing a property in a particular region or location. This will help you save a considerable sum on property investment.
4. Self-manage the property
Hiring property managers and companies is definitely helpful. However, paying them is quite expensive, especially initially when the business begins. Instead, use property management software to efficiently manage the property on your own.
5. Compare the insurance deals
Always get quotations from multiple insurance companies before finalizing your coverage plan. This will help you find a plan with extensive coverage for competitive rates.
Conclusion
And that’s it. By now you must have a fair understanding of how much it costs to start a rental property. What next?
Let’s now calculate the actual costs for your rental business using our startup cost worksheet and budget for your startup accordingly.
Use Upmetrics for Accurate Startup Cost Projections!
Looking to estimate your startup costs? Dive into Upmetrics! Our business plan software makes financial forecasting a breeze
