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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.
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.
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.
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.
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:
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.
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 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.
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.
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.
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.
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.
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.