how much do you need to buy a rental property?

One of the biggest roadblocks to investing in rental properties is the money required to buy a rental property. I believe buying rental properties is one of the best investments for increasing wealth and creating passive income. I am relying on my rental properties to give me enough income for retirement as well as offer a luxurious life. However, it is not easy saving the money to buy rentals. Although there are ways to buy rentals with less money down, this article will focus on how much money you need to buy a rental the traditional way with a bank. I have purchased 20 rental properties since December 2010 and I am seeing at least 15 percent cash-on-cash returns on them. I detail my strategy on purchasing, financing, and finding rental properties in My Complete Guide to Purchasing Long-term Rental Properties. Rental properties are a great investment, but they require a lot of money in most cases. It is simple to figure the cost on a rental property if you are paying cash, but things get more complicated when dealing with financing. Most banks require 20 percent down when buying a rental property and you have to consider carrying costs and repairs as well.

How much money do you need for a down payment on a rental property?

[xyz-ihs snippet=”PDF—How-Much-Money-is-Required-to-Buy-a-Rental-Property”]

It can be expensive to buy rental properties since most banks require at least 20 percent down. If you are looking for cheaper ways to buy rentals, check out this article. If you are looking to buy many rental properties as I do, it is tough to avoid putting 20 percent down. Many banks start requiring 25 percent down once you have four mortgages in your name. Most banks will stop lending to you all together once you reach ten financed properties. There are ways to finance more than four and more than ten properties with a portfolio lender. Down payments are not the only factor when determining how much money is needed to buy rental property.

How much money is required for loan and purchase costs on a rental property?

Depending on house values in your area, a 20 percent down payment can be a lot of money. The houses I buy are usually right around $100,000, which is about $20,000 needed for the down payment. You will also have closing costs when purchasing an investment property, which consists of interest, insurance, recording fees, origination fees, tax certificates, appraisals, and more. It is usually safe to assume closing costs will be at least three percent of the purchase price, but you can ask the seller to pay all or part of your closing costs. I usually ask the seller to pay part of my closing costs to reduce the amount of cash I have into a property. You also may have to pay for an inspection, which can cost $250 to $500 and some sellers such as HUD do not pay for title insurance, which can add another $500 to $1,000.

Here is a great program that helps calculate the costs and returns on rental properties.

How much money do you need for repairs and carrying costs on a rental property?

Repairs can add a huge chunk to how much money is required to buy a rental property and you have to wait for the repairs to be completed before it can be rented. While you are waiting for repairs, you are paying carrying costs on that property, which also increases the money needed. You will have to pay interest, utilities, taxes, and insurance until the home is rented. In a perfect world, it should only take a week or two to have a professional contractor complete most repairs, but it usually takes longer. Here is a great article on how to determine what to repair on a rental property.

As for repairs, they usually cost more than you think they will. On a house that needs minimal repairs, I still assume that I will need at least $5,000 in work done before it can be rented. On a house that requires more repairs and updates, I can easily spend $20,000 or more. It is always the little things that take time and add up to big repair costs. As a general rule of thumb, I always add $5,000 for unknown costs on any rental or fix and flip that I buy.

Make sure you get bids if you are not an expert at estimating repairs. Estimating repairs can be a very difficult thing to do, even for experienced investors. Repairs always seem to cost more than the investor thinks they should and contractors always seem to find more things that need to be repaired.

Turnkey rental properties are one way to save money on repairs and put less money into rental properties.

How much total money will you need to buy a rental property?

Here is a breakdown of the costs that I would normally have on a $100,000 rental property.

Down payment:    $20,000

Closing costs:        $3,000

Repair costs:         $10,000

Carrying costs:      $1,000

Total investment:  $34,000

These figures would be on a home that needs moderate work. I am a real estate agent, which means that if I had purchased this house from the MLS, I would get back about $3,000 in real estate commissions. I could also ask the seller to pay $3,000 of my closing costs if I thought it would not jeopardize my chances of getting the deal.

Having to put 25 percent down on a property would greatly increase the amount of money needed. Repairs costs will affect how much money you would need as well. Another factor to consider is that the bank will want you to have money in reserves when you get an investment property loan.

For more information on investing in rentals the right way, check out, Build a Rental Property Empire: The No-Nonsense Book on Finding Deals, Financing the Right Way, and Managing Wisely. The book is 346 pages long, comes in paperback, as an audiobook, or as an eBook, and is an Amazon bestseller.

How to save money when buying a rental property

There are ways to decrease how much money is required to buy rental property. You may find a gem that needs no repairs at all, but it is rare to find a home that is a great deal and in good shape. Rental property number ten and rental property number nine were both in decent shape and purchased below market value. You can ask the seller to pay part of your closing costs when making an offer. It is very common for a buyer to ask for two or three percent of closing costs to be paid by the seller. If the seller does not want to budge on price, raise the price of the property to make up for the closing costs. The cash you save up front will make up for the slightly higher loan and purchase amount.

If you are a real estate agent, you can also save a lot of cash on each property you buy. I am a real estate agent and I save thousands on each property I buy because I am paid a commission for my side of the transaction. This decreases how much money is required to buy rental property tremendously. Here is a much more detailed article on how becoming a real estate agent will save you money when investing. Here is another article on how much money real estate agents can make.

Here is a more detailed article on how to save money for a rental property.

Hw much cash reserves are needed when purchasing a rental property?

If you find yourself looking to invest and have saved just enough to buy and renovate a property, be careful! There are always unexpected costs and delays associated with repairs. Make sure you have a cushion in the bank for the worst-case scenario. I suggest at least six months of mortgage payments, taxes, and insurance as reserves for each property you own. This would be money on top of the initial investment used for repairs and carrying costs.

Here is some great free software for landlords as well as access to tenant screening services to make sure you get the right tenants!

Conclusion

You may need as much as $30,000 to buy a $100,000 house, but that can increase if many repairs are required or if you have to put down more than 20 percent. You need to make sure you have enough reserves if things do not go as planned. Remember, if you are purchasing more expensive homes, that number will increase significantly and it will decrease if you are buying lower-priced homes. For information on putting less money down on rental properties, check out this article. You can also try house hacking to save money or the BRRRR method.

36 thoughts on “how much do you need to buy a rental property?”

  1. Hi Mark, I am interested in property management and currently don’t have a lot of money, what advice would you give me as far as getting educated and getting started?
    Thanks in advance.

  2. Hi Mark, through savings/investments, over the next couple of years I may have around $300,000 – $400,000 to invest in property. I am based in the UK but feel USA investment is a much better market to start off a real estate investment business/income etc. I would also look at properties in the $100,000 range, location does not bother me, purely where the best returns are to be found. My question is – if you were in this situation, would you use that cash to acquire as many properties as possible, so for instance just using $20,000 – $40,000 per property for downpayments/repairs/costs etc, maybe building up to say 10 properties that way, or would you put as much cash as possible into higher value properties/higher rental income and just purchase 1 or 2??

  3. Hi there, sorry to bother but I’m looking at purchasing a $200,000 apartment in cash, but I have no idea how to go about it as I recently moved to Co from Hong Kong. What extra fees am I looking at running into and what first steps should I take to lock it down? Also what happens if I’m getting that money from one of my parents but I want the apartment to be in my name? Sorry for all the questions!

  4. Everything made perfect sense to me except for this statement:

    “If the seller doesn’t want to budge on price, raise the price of the property to make up for the closing costs. The cash you save up front will make up for the slightly higher loan and purchase amount.”

    Okay, let’s say I’m buying a $100,000 home with $5000 in closing costs (just round numbers to keep it simple)… Are you saying pay him $105,000 for the house, THEN ask him to pay for closing costs out of that? That’s probably what you mean. Really good idea.

    I just had my first investment property purchase fall through because the other bidder paid cash. He offered less (I don’t know how much less until it’s available on Zillow), but apparently cash is very attractive.

    Thank you for all the information.

  5. Mark in reference to Winny’s question- Can we contribute money to our son for the downpayment. We also plan to
    rent from him? Thanks

  6. Hi me and my husband bought a 8 – plexs last year and we are living in it to we are thinking about buying another 8 plexs or 4 pled in 3 to 4 years any way this is the best way to become wealthy

  7. My son had a short sale on his house 3 years ago and is currently renting in California. We (elderly mother (68) on SS and husband ( 3 years shy of retiring) are currently renting in Texas. My son wants to buy a house in Texas so we can rent from him, which would give him a break from taxes. How is he able to do it. He has about 45000 to put down as a downpayment. My son’s salary is about 200.000 a year. The house is about 252.000 and is brand new. Please advise. Thanks so much.

    • Hi Winny,
      I would talk to an accountant first to make sure he is getting all the breaks he thinks he will. The first thing to do is to talk to a lender and see what his options are. He will probably need a larger down payment as an investor.

  8. Eugenia is going to have to move back into the first home to get any cash out. Here in Florida the lenders will not give you cash out or credit lines on investment homes. Move back in, do the refi and credit lines, then when you have lived there long enough meet you contract requirements you rent it again. I am closing on another refi this week and I own 10 SFR.

  9. Mark,

    We have about 150K in equity on our first home which we purchased almost 16 years ago. This home is now a rental property – leased for 3 years by a nurse. i read in your blog that most banks usually require 20 to 25% down, which will be 65K for a 255K home. Do you think we can use the equity that we’ve built on our first home for a down payment for this home? We don’t live in that house anymore, we’ve converted it to a rental property.

    Your help is very much appreciated.

    Thanks,
    Eugenia

    • Hi,You would have to refinance the house or get a line of credit in order to use that money for a down payment on a new investment. Are you buying a house for rental or as owner occupants? If you are owner occupants you can buy with less money down.

  10. This isnt useless advertising. Hes got experience to back his knowledge up. Id do the same if I wrote an article like this! If he makes money off this then good for him! What have you done? Good stuff mark id like to chat a bit more with an experienced person on real estate would you email me at [email protected] thanks!

  11. Is this General Information or specific information in Colorado? I am in school right now for Carpentry/Construction and desire to move to real estate.

Leave a Comment

shares