During the process of buying this house we discovered many extra costs that we didn’t even think about. We obviously had to factor in the mortgage, taxes, and insurance, but many other charges make up the total monthly cost of owning a rental:
1. Mortgage Insurance! So apparently if you make a down payment less than 20% of the loan then you have to pay this pesky mortgage insurance. I know...Lame! If you want to get into real estate and you don’t have this much to put down then expect to pay .05% - 1.0% of the entire loan amount on an annual basis. You must pay this premium every month until the Loan to Value ratio is below 20%. In many case this may take around 9 years to achieve if you just make normal monthly payments.
2. Mortgage Insurance Premium! Yep, that’s right, more insurance! If you take the less than 20% down payment road, then the day you close on the loan you have to pay a premium. This premium is usually around 1.5% of the loan value. Outrageous! But if the income from the rental outweighs the extra costs that mortgage insurance brings, then by all means...Buy!
3. Repairs. The older and more rundown your house is the higher this expense will be each month. So buyers beware of money pits. We’ve lucked out on this one so far.
4. Garbage, Sewer, Water, etc. These expenses depend on whether you make your tenants pay for them or not. As an extra benefit of living in our house, we don’t make the tenants pay for these items. They only have to cover electric and gas.
5. HOA Fees. (If applicable) Usually if you own a condo or townhome you will have HOA fees that cover many things like exterior maintenance, grounds keeping, garbage, internet, etc. Every complex is different, so you will have to verify what is covered under HOA.
6. Management Company Fees. In our case we manage our own property, but eventually we may pay a management company when we move out of state. This cost varies by area and to what extent you want the company to control your property.
Other costs may exist depending on where you live, but these are the costs we have seen in the Provo area and with our own house. We searched for months before finding a property where the total costs were far enough below the potential rents.
If you’ve seen additional costs with owning a rental I would love to hear about them.