Getting Started
Initial renovations
Some buyers choose to renovate before moving in. Examples of renovations include changing the flooring, repainting the walls, updating the kitchen, or even overhauling the entire interior or exterior. While these expenses can add up quickly, renovation costs are optional, and owners may choose not to address renovation issues immediately.
Closing Costs
Those one-time fees incurred when finalizing a real estate deal, while not recurring, can often be significant. In the United States, mortgage closing costs encompass a range of charges such as attorney fees, title service fees, recording expenses, survey costs, property transfer taxes, brokerage commissions, mortgage application charges, points, appraisal fees, inspection costs, home warranties, pre-paid home insurance, pro-rated property taxes, pro-rated homeowner association fees, pro-rated interest, and more.
Vacancy Rate
The vacancy rate indicates the percentage of time a rental property is unoccupied, resulting in lost rental income. Investors use this metric to assess demand, with lower vacancy rates signaling a favorable market for landlords. While the U.S. rental vacancy rate is reported at 6.8% by the Federal Reserve (2021), investors should prioritize comparing their property’s vacancy rate to the local market average for a more pertinent evaluation.
Fees
Maintenance Fee
Maintenance fees are typically included in the monthly management fee, covering tasks like cleaning common areas, garbage and snow removal, and leaf clean-up. If specific repairs are needed, the cost is deducted from a separate reserve repair fund, which the landlord maintains for property repairs. There are various ways to manage this fund, including authorizing each repair deduction, being notified only for repairs over a certain amount, or allowing the property manager discretionary use. A minimum balance, often equivalent to one month’s rent, must be maintained in the reserve account.
Management Fee
Property managers charge a monthly fee for overseeing properties, either as a flat rate or a percentage of the rental income. The average property management fee for US rental properties ranges from 8% to 12% of monthly rental income. While some charge as low as 6% and others as high as 14%, the typical rate is around 10% of revenue. Additional charges for maintenance services, such as garbage and snow removal, may apply.
HOA (Homeowners Association) Fee
Homeowners association (HOA) fees, collected monthly from property owners, are standard for condominiums, apartments, and planned communities. They also apply to some single-family home neighborhoods. These fees, ranging from $200 to $300, cover amenities, property maintenance, and repairs, varying based on property type and services provided. Generally, HOA fees aren’t tax deductible. But there are some exceptions for business owners or landlords.
Insurances & Taxes
HMI (Homeowner Insurance)
This type of property insurance covers losses and damages to your real estate and its assets or other home-related incidents. The national average home insurance cost is approx. $1,700 per year for $250,000 in dwelling coverage. Rates vary due to factors like home age, size, location, and building materials. Oklahoma, Kansas, and Nebraska are the most expensive states, while Hawaii, Vermont, and Delaware are the least expensive. Rising costs are attributed to inflation, supply chain disruptions, and increased material and labor expenses.
PMI (Private Mortgage Insurance)
When applying for a mortgage, a 20% down payment may be required; otherwise, mortgage insurance (PMI) is necessary. PMI protects the lender if the borrower defaults on the mortgage. It’s usually included in monthly payments but can be removed as the borrower pays down the mortgage principal. Alternatively, avoiding PMI is possible by combining a smaller loan with the primary mortgage for the down payment. PMI costs, ranging from 0.5% to 2.25% of the mortgage loan annually, vary based on factors like loan size and credit score. For a $200,000 loan with a 1% PMI fee, it adds around $2,000 annually or $166 per month to the mortgage payment.
Property Tax
US homeowners face a median annual property tax of $2,690, with effective state rates ranging from 0.29% in Hawaii to 2.47% in New Jersey. New York records the highest average tax bill at $12,292, while Alabama has the lowest at $882. Nationally, the effective property tax rate is 1.10%, translating to $224.17 added to monthly mortgages for the median home price of $244,900. Using the average home value of $346,270, the average annual tax bill is $3,803, equivalent to a $316.92 monthly mortgage addition. Property tax affordability varies significantly by state and locality.Some banks may establish an escrow account to collect these additional expenses, which are factored into your installments.