David from Atlanta asks:
“In your (income property) post, you mention “Mortgage, Insurance, Taxes, Water, Trash, Repairs, etc. = $950 per month”. I realize the example is hypothetical, but in real life, how would you determine these costs?
“Is there some official city website that details cost of services (trash, taxes, etc), or do you have to keep your fingers crossed and wait for the bills to start coming in to see if everything balances positively?”
Here’s my answer. Please note that water prices, trash prices, and insurance rates vary based on your location.
The numbers I’m using are specific to Atlanta. You’ll have to adjust for the nuances for your own city/town.
That’s the easy part. Go to mortgagecalculator.org . Assume your interest rate, right now (early 2012), will be 3.5 to 4 percent if you have good credit, but keep an eye on rate changes. If you’re cash-out refinancing a home, add about 1 percent to the standard mortgage rate.
Remember: If you put 20 percent down, you won’t have to pay private mortgage insurance (“PMI”).
Multi-family houses need commercial insurance, which is pricey. My multi-family house is insured for $300,000, even though we bought it for $225,000. (We insured it for the amount it would cost us to rebuild it). We pay $3,000 per year, or 1 percent of the home value.
For a single-family home, I’d cut that insurance price roughly in half, since you’ll have “residential” insurance instead of “commercial” insurance. In Atlanta, a single-family home insured for $130,000 should cost $800 to $1,000 per year.
We paid $350/mo for water when we bought this house. Five people lived there, which means water cost $70 per person per month.
After installing low-flow toilets, shower heads, sink aerators, etc., we got it down to $250 per month, with an extra person living in the house. That’s only $41 per person per month.
Atlanta has some of the most expensive water/sewage rates in the country. You’ll pay far, far less in most other cities.
This will vary based on your city. We pay $33/month for a single-family home. My triplex costs $100/mo for trash ($33 per unit * 3 units), because the City of Atlanta regards each unit as a separate home.
Not all cities insist on charging multi-unit houses as “separate” houses, so research the policies of your particular city.
If you have more than 4-5 units in a single building, it’s often cheaper to just forgo the city trash services, and rent a dumpster through a private company. (Assuming your city allows this.)
Depends on the age/condition of the house! No rule of thumb there.
Assuming a “perfect” house, a general rule of thumb is 1 percent of the purchase price per year. You won’t literally spend that each year, but that’s how much you should “set aside” for those once-in-a-decade things like replacing the roof, replacing the water heater, etc.
It’s good to set aside a nice “rental property emergency fund” for home repairs and maintenance. The water heater can burst at 2 a.m., or the dishwasher can overflow, ruining the carpet, or any number of other things can go wrong.
Many people don’t like the idea of cash “sitting” in their savings account, earning a return that’s so low it can’t even keep pace with inflation.
I’d rather forgo some returns so that I can maintain a strong emergency fund. The more houses you own, the more likely something will go wrong. Stash a few thousand bucks in a savings account to bail you out of an unexpected situation.
This usually costs 8 to 10 percent of the rental income, plus one month’s rent per year.
Some property managers only charge one month’s rent “per lease signing,” so if they sign a tenant to a 2-year lease, you only pay one month’s rent per 24 months, plus 10 percent ongoing. You’ll have to negotiate this with the manager you hire.
You can always manage it yourself, as I do. (Although this takes time – and time is money. If you manage it yourself, you should “pay yourself.”)