When you go to buy your first investment property it’s important to understand all the hidden expenses.
Let’s break them down.Purchase price –
Purchase Price –
Cash is king. If you have cash, great. You’ll save a ton of money.
Hard money is the option for most new investors. A typical hard money loan has a 6 month term. You usually pay points (avg. 3-5%) and an interest payment per month (avg. 12-15%)
To calculate, see the example below:
$100,000 purchase price x 5 points (initial loan cost) = $5,000
(most lenders will wrap this into the loan so essentially you’re financing $105,000)
$105,000 x 15% = $15,750 divided by 12 months = $1,312.50 Interest paid per month.
Closing costs –
This expense truly varies. You have costs when you buy and costs when you sell. My partner and I typically budget 6% for closing costs. I want to budget high on this because almost every buyer asks for closing costs in negotiations. If you don’t plan for that in your budget it could hurt. This amount will also include any property taxes that you may have accrued when owning the home.
Realtor fees –
Realtor fees for selling a property in most cases is 6%. If you’re doing a bunch of business I would try to negotiate a 5% rate with your listing agent.
You must keep insurance on your investment. Our recent properties have ranged from $150 to $225 per month based on the value. Budgeting $200 per month is safe.
Rehab or Improvement costs –
This is a blog post, all by itself. I will say that if you’re doing a whole home rehab it will range from $30,000 to $60,000. We add the cost of all our new appliances into this total amount. It’s easy to forget $3,000 worth of appliances. 🙁
Staging and Pictures –
We tried to sell our first home without staging and it was a mistake. We will never do it again! Our budget for staging is $2,000. Spend some money showcasing your work with professional pics. Plan $250 for them.
Below is a basic table we use to budget our projects. It includes the base price and carrying costs (monthly expenses). Because hard money loans are a 6 month term we budget all our expenses for that long. Basic formula: 2 months to rehab, 2 months to sell, 2 months to close.
|Financing – 5 points||$5,000|
|Interest – 15% X 6 months||$7,875|
|Closing cost when buying 3%||$3,000|
|Closing cost when selling 6%||$6,000|
|Realtor Fees 6%||$6,000|
|Insurance – 6 months||$1,200|
|Rehab (Including appliances)||$40,000|
|Staging and Pictures||$2,250|
Total Investment expense – $171,325
I would encourage you to create something like the chart above for your business. You may know everything but before making an offer, consult your chart! Omitting one of these could alter your offer price and make the project less profitable.
Get out there and Buy!
Let’s Do This, Monica