It was a mixed bag for home affordability in early 2024. See the income you need to buy a median-priced home in the top 50 metro areas for details.

It was a mixed bag for home affordability in early 2024. See the income you need to buy a median-priced home in the top 50 metro areas for details.

8 costs to consider when buying a rental property

Apartment BuildingEven as home prices and mortgage rates rise, there are still bargains available for borrowers looking to purchase rental properties, although they aren't as abundant as they once were.

According to the National Association of Realtors' 2015 Investment and Vacation Home Buyers Survey, investment-home purchases accounted for just 19 percent of all sales in 2014.

 “Despite strong rental demand in many markets, investment property sales have declined four consecutive years to their lowest share since 2010 as rising home prices and fewer distressed properties coming onto the market have further reduced the number of bargains available to turn into profitable rentals,” Lawrence Yun, NAR chief economist, said in a statement.

While rental properties are certainly appealing, offering the promise of monthly cash flow in addition to long-term appreciation, investment properties have a number of costs that are both visible and hidden, says Michael Whitbeck, founder and CEO of UberWriter, an underwriting website based out of Michigan. Even the most obvious expenses, like the monthly mortgage payment, might pack a few surprises.

Calculate your monthly mortgage payment with our Mortgage Calculator.

Before you start searching for rental properties, run the numbers to understand whether investing in a rental property will be a windfall or a money pit.

8 rental costs to consider

No. 1: The down payment and interest rate

"In this market, with rental rates soaring, purchasing rental properties has become a great avenue for investors,” says Kurt Johansson, senior loan officer for Shelter Mortgage Company in Nashville. “These are considered riskier investments in the eyes of the lenders and thus, require a minimum of 20 percent down payment and 0.75 percent higher interest rate. For three-to-four unit properties, a minimum of 25 percent down payment is required.”

No. 2: Property taxes

Depending on where you purchase, property taxes can add significantly to the property cost, says Whitbeck. Be sure to contact the municipality directly to ensure that the taxes listed on the Multiple Listing Service are accurate. It's also a good idea to find out what services those taxes include. For example, does that include garbage removal?

No. 3: Homeowners insurance

Nat Kunes of AppFolio, Inc., a property management software company in Goleta, California, warns that insurance can also vary significantly depending on your region, especially if your home is located in an area prone to flooding, fires or other perils. Be sure to discuss rates with an insurance representative prior to entering a contract on the property.

No. 4: Maintenance

"We've found it's a good rule of thumb to reserve 10 to 12 months of rent per property to cover maintenance and vacancies, especially for those landlords who own few properties," says Brandon Rumbley, affiliate broker/owner at Renew Real Estate Services in the Greater Nashville area.

Whitbeck says it's a good idea to budget 10 to 15 percent of the annual property rent for maintenance and upkeep of the property, in addition to any tenant-caused damage that should be covered by security deposits.

"To get the maximum value of your property when you want to sell it, you're going to have to keep it in good condition," Whitbeck says.

No. 5: Association fees

Some condominiums and homeowners associations have monthly fees associated with them. These also need to be included in your budget. In addition, warns Whitbeck, if the unit is part of an association, first make sure there are no rules against rentals.

No. 6: Utilities

While utilities like gas and electric are often the responsibility of the tenant, some services, like water and sewer, might be included in the rent. If you plan to include utilities in your rental price, get an estimate from the utility companies of the average monthly usage.

No. 7: Tenant search

Finding good tenants also carries a cost. John Brevard, owner of West End Properties in Nashville, charges prospective tenants a nonrefundable $25 application fee to be considered for his properties to defray that cost. "Of course, that dollar amount varies," he says.

Indeed, Rumbly charges a nonrefundable $35 application fee for any occupant 18 years or older. 

Hiring a property manager or real estate agent to handle the search for you will carry an additional cost that varies considerably by market.

No. 8: Vacancy allowance

Whitbeck warns landlords not to assume the property will be rented 12 months out of the year. He advises allowing two months of vacancy, if possible, when setting rents.

Overall, Brevard says he generally retains 1 percent to 2 percent of the property value that he owns or manages to pay things like vacancies and repairs.

But the amount you should retain really depends on your market. Undeniably, it's essential to understand your market to know how long rental properties typically stay on the market.

If you've tallied up these expenses and you're still in the black, a rental property might be a good investment. Budget carefully and stay on top of rent collections to ensure your rental property pays off.

Mitch Strohm contributed to this article. || Image: iStock (Gesundheit)

Carolyn November 1, 2018 6:34 pm

This is good needful info. I'm wondering if it could be profitable to use a property manager?

property management in Wellington September 13, 2018 11:46 am

Fantastic blog about rental property you have written, it is really very useful to me. Thank you so much.

April Cook July 29, 2016 6:47 pm

I really like your tip to factor in vacancies when setting rents. I never thought of this when considering buying a vacation rental. I'll have to consider this when we are trying to decide on a location. We won't want to choose a place that has a long off season. Do most owners charge a cancellation fee to help mitigate any losses? Thanks or sharing these great tips!

Luke Yancey June 27, 2016 2:10 pm

Thank you for mentioning property taxes. My mother is a real estate agent, and says that sometimes realtors will leave property taxes out of their pitch until the last minute to ensure the place is sold. I feel to make a good decision a buyer needs to know this information as soon as possible. If you are looking for a place, don't be afraid to ask right off the bat if property taxes are an issue.

Kyle O'Ren May 24, 2016 5:41 pm

This is great advice, especially about searching for tenants. We are looking to buy our first rental property soon and are planning on doing a pretty large scale renovation. Of course we don't want that money to go to waste so we definitely need to find the right people to live there and an application fee is just the thing to make sure people are serious about living there. Thanks for the idea!

Jasmine Ramons May 12, 2016 2:03 am

This is a great tips, buying a rental property could be one of the hardest decisions in terms of long term assets.

Patricia Anderson April 4, 2016 3:06 pm

I didn't realize just how profitable it could be to enter into a rental properties investment. My mom has been talking to me about a few home leasing companies in Arizona she has been looking at. For some reason I thought real estate wasn't doing very well right now. I'll have to check investing in rental properties now that I know it is doing good, thanks!

Onzo Wilkerson March 25, 2016 12:05 am

Is the down payment on multi-family homes such as 2-units, the same as single family rental properties?

Editorial Team March 28, 2016 4:07 pm

Onzo, Thanks for commenting. The down payment is a percentage of the property price. To learn if there is a specific percentage requirement, you will need to discuss that with a lender. -Tim Manni, HSH.com

Braden Bills March 17, 2016 1:08 pm

I've been considering buying a rental property, but I didn't know about what costs to think about. I didn't even think about the tenant search! I'll make sure I take all of these into account while managing the rental property. Thanks for the info!

Raylin Sutter January 5, 2016 4:04 pm

My husband and I are really interested in buying property and are always looking at different locations. We recently came across a couple different ones that we are willing to consider. However, there are other considerations to think about as well, such as association fees. We don't mind those too much, but how do you make sure that that fee is going to be used for our benefit?

Editorial Team January 5, 2016 4:56 pm

Raylin, Thanks for commenting. You'll have to contact the association to see exactly what the fees cover (garbage pickup, repairs, snow removal, etc.). -Tim Manni, HSH.com

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