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The cash you need to buy and operate a rental home is the down payment plus closing costs, inspections, any repairs before the first tenant, leasing costs, a few months of carrying costs while the home is empty, and a cash reserve for surprises. The down payment is usually the biggest piece, but investors who only save for the down payment are the ones who end up scrambling when the furnace quits in month three.
This guide breaks the total into each bucket, shows a clearly labeled example, and lists what JMZ Management charges at the start of a management relationship so you can plan for it.
Key takeaways
- Plan for six buckets of cash: down payment, closing costs, inspection, make-ready repairs, leasing and carrying costs, and reserves.
- Investment property loans usually require a larger down payment than a home you live in. Get your lender's terms in writing early.
- Budget for at least one month with no rent while the home is prepared and leased.
- Keep a separate cash reserve for the home, not just your personal savings.
- Ask every vendor, including your property manager, for start-up fees in writing.
Step 1: The down payment
Lenders treat a rental differently from a home you live in. Expect stricter terms, and ask your lender for the minimum down payment, the rate and any reserve requirement for an investment property before you start shopping. If you are buying through an LLC or with business financing, read our posts on using a business loan to buy rental property and transferring a rental to an LLC.
Step 2: Closing costs and inspections
Closing costs cover lender fees, title, recording, prepaid taxes and insurance, and similar items. Your lender's Loan Estimate shows the real number for your deal. Our post on reducing closing costs on a rental has ideas for lowering them.
Do not skip the home inspection. It is the cheapest way to learn what repairs are coming, and it can give you room to negotiate the price.
Step 3: Make-ready repairs before the first tenant
Most homes need some work before they are rent-ready: paint, flooring, smoke and carbon monoxide detectors, appliance fixes, cleaning and landscaping. Many Metro Detroit cities also require a rental certificate and inspection before a tenant moves in, and any violations have to be fixed first. Our make-ready checklist lists what to plan for.
Step 4: Leasing costs and carrying costs while the home is empty
You pay the mortgage, taxes, insurance and utilities while the home is being prepared and marketed. Plan for at least one month with no rent. When priced to market, JMZ reports an average of 17 days from listing to signed lease, but repairs and city inspections can add time before the listing even starts.
If you hire JMZ, these are the start-up costs to plan for:
- Leasing fee: the first month's rent, charged when the vacancy is filled. None applies if a tenant is already in place.
- New client fee: a one-time fee. The amount is not published, so ask for it in your proposal.
- Management fee: 10% of monthly rent, $100 minimum, and none while the home is vacant.
Step 5: A cash reserve for the home
A reserve covers what the rent cannot: a sudden repair, a slow lease-up, or a tenant who stops paying. At JMZ, owners pay for most repairs, and any work order over $500 requires owner approval with a contractor estimate, so you need cash available to say yes to a needed repair. Our post on an emergency fund for rental property owners covers how to size and hold one.
Step 6: Add it up (example)
Example only. These numbers are made up to show the math, and the percentages are assumptions, not market data. Replace each line with your own lender, title and contractor quotes.
- Example purchase price: $220,000
- Down payment at an assumed 25%: $55,000
- Closing costs at an assumed 3% of price: $6,600
- Inspection: an example $500
- Make-ready repairs: an example $5,000
- One month of example carrying costs (mortgage, taxes, insurance): $1,558
- JMZ leasing fee equal to the first month's rent, on an example $1,900 rent: $1,900
- Cash reserve: an example $10,000
Example total: about $80,558 in cash before the first rent payment arrives, plus JMZ's new client fee. Notice that the down payment is only about two thirds of the total in this example.
Common mistakes
- Saving only for the down payment
- Assuming a tenant moves in the day after closing
- Forgetting the city rental inspection and the repairs it can trigger
- Mixing the rental's reserve with personal savings and spending it
- Not asking a property manager for every start-up fee in writing
- Skipping the inspection to win the deal
Frequently asked questions
How much cash do I need to buy a rental property?
You need the down payment plus closing costs, inspection, make-ready repairs, at least one month of carrying costs, leasing fees and a separate cash reserve. Your lender's terms and the home's condition decide the total.
How much should I keep in reserve for a rental home?
There is no single right number. Size the reserve to cover a major repair, a slow lease-up and a few months of carrying costs, and keep it separate from personal savings.
What does it cost to start with a property manager?
At JMZ Management, the leasing fee is the first month's rent when a vacancy is filled, and there is a one-time new client fee whose amount is not published. There is no management fee while the home is vacant.
How long until a new rental starts producing income?
It depends on repairs, city inspections and pricing. Once a home is listed and priced to market, JMZ reports an average of 17 days from listing to signed lease.
Related guides and resources
- JMZ pricing
- Rental owner FAQ
- 7 things to handle before your first tenant moves in
- What's a good ROI on rental property?
- Property management in Livonia
The bottom line
The down payment gets you the keys. The rest of the cash keeps the rental running until it pays for itself. Budget for all six buckets, and you can handle the first surprise without stress. At JMZ Management, your property is our business.
This article is for general information only and is not legal, tax or financial advice.
Planning a rental purchase? Get a free rental analysis or management proposal at jmzmanagement.com/freerentalanalysis or call 248-284-6990.
CONTACT US to learn more about professional property management in Michigan.
