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Your Down Payment Is NOT Enough: The Real Cost of Buying a Rental Property

Your Down Payment Is NOT Enough: The Real Cost of Buying a Rental Property

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Your Down Payment Is NOT Enough: The Real Cost of Buying a Rental Property You saved the 20% down payment. You found the property. You got the mortgage. You're ready to buy. Not quite. On today's Canadian Real Estate Investing Morning Show, Wayne and Gabby break down the costs investors often forget when budgeting for their first rental property. Using a hypothetical $500,000 legal suited house, they show why an investor who thinks they need $100,000 may realistically want closer to $116,000 to $117,000 available before closing. The difference comes from expenses that are not necessarily hidden, but are very easy to forget. The $500,000 Rental Property Example Assume you're buying a $500,000 house with a legal basement suite. At 20% down: Down payment: $100,000 Most new investors stop there. But the down payment is only one part of the cash required. Before buying, Wayne and Gabby say investors should also think about: AppraisalHome inspectionSewer scopeLegal feesTitle insurance or related closing costsProperty tax adjustmentsImmediate repairsCleaningFurnace and duct servicingYard cleanupReserve funds These seemingly smaller costs can quickly add thousands of dollars to the amount required. Appraisal Mortgage lenders commonly require an appraisal to confirm the property supports the value being financed. Wayne and Gabby suggest budgeting roughly: $300–$500 depending on the lender and property. Sometimes the investor does not even notice the cost because it appears through closing adjustments or is withdrawn separately. But you are still paying for it. Home Inspection Wayne and Gabby strongly recommend having the property professionally inspected. For the suited-house example discussed today, they suggest budgeting approximately: $600 A good inspector evaluates the major systems and components of the property, including: RoofAtticFoundationPlumbingElectricalHVACAppliancesMoistureSmoke detectorsDoorsFlooringExterior components The inspection also gives you a roadmap of items that may need attention immediately after possession. Sewer Scope This is one Wayne strongly recommends. For an older residential property, he suggests having the sewer line inspected with a camera. Budget approximately: $250–$300 Why? Because a sewer replacement can be extremely expensive. Wayne and Gabby discuss a previous replacement that cost approximately $15,000 before additional related work. A few hundred dollars spent investigating the line can uncover a potentially very expensive problem before closing. Legal Fees Legal costs are another expense investors sometimes underestimate. Depending on the transaction and legal team, Wayne and Gabby suggest costs may range from roughly: $1,500 to $2,000+ Wayne's approach is not to select a lawyer based solely on price. A straightforward transaction is straightforward until something goes wrong. That is when having the right professional matters. Title Insurance and Closing Adjustments Depending on the property and province, investors may also encounter costs such as title insurance. Property tax adjustments are another common surprise. If the seller has already paid property taxes for a period after your possession date, the seller is credited for that amount at closing. That increases the cash you need to bring to the lawyer. The Property Will Probably Need Something Wayne says almost every property they buy requires immediate work after possession. Not necessarily a major renovation. It could be: Expired smoke detectors. Doors that do not close properly. Loose baseboards. A leaking shower diverter. A thermostat that is not mounted correctly. A furnace that has not been serviced. A damaged closet door. Minor plumbing or electrical issues. Individually, these may seem small. Together, they add up quickly. Wayne and Gabby typically budget: $2,000–$3,000 per property for immediate repairs and maintenance. Don't Defer Everything One mistake investors make is saying: "It's not that bad. I'll deal with it later." But deferred maintenance eventually becomes your problem. Wayne and Gabby prefer to fix smaller issues before placing a new tenant whenever possible. That provides a safer, cleaner and better-maintained property for the tenant while reducing the likelihood of emergency service calls later. Cleaning, Furnaces and Landscaping Other costs investors can easily overlook include: Professional cleaning. Furnace servicing. Duct cleaning. Gutter cleaning. Landscaping. Lawn cleanup. These expenses can add hundreds or even thousands more depending on the condition of the property. When Wayne and Gabby added the potential acquisition-related costs together in today's example, they reached approximately: $6,750 beyond the down payment. And there is still one more major item. The Reserve Fund Wayne considers this one of the most important systems an investor can put in place. Start every rental property with a cash reserve. His recommendation: Three months of rent on day one. If the ...
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