Getting Started: Money, Time, Risk
How much does it cost to buy an investment property? How much time will be required? What are the risks? This white paper provides general answers to these questions. Know that our discussion is relevant to Las Vegas, Nevada. Your geographic area may be different.
In general, the total acquisition cost can be subdivided into the following categories:
- Down payment
- Closing costs and loan fees
- Market Prep costs
- Holding costs until the property is rented
There will be recurring costs once the property is acquired which include debt services, HOA dues, taxes, insurance, property management, etc. Since the concept of investment property is for the rent it generates to cover all recurring costs, our discussion here will focus on how much upfront costs you can expect to incur.
As an example, we assume that the purchase price is $200,000. Most investors we work with use conventional 20% down, 30-year fixed rate mortgages. So the down payment is 20% of the purchase price, or $40,000. Closing costs on a $200,000 property are typically about 3% of the purchase price. In Las Vegas, properties are designed for hot climate and have tile roofs, metal doors and window frames, stucco siding and desert landscaping (rock). Because of the duriable nature of the construction, typical market prep (rehab) costs average less than $5,000. Lastly, because of the way mortgages are structured, there is typically no payment until the 1st of the following month, meaning you have no payment for 30+ days. In Las Vegas, it is unusual for a properly priced and market ready property to take more than 30 days to rent.
The following are the approximate costs assuming a 4.5%, 30 year, 20% down mortgage and a property tax rate of .86%:
- Down payment: $200,000 x 20% = $40,000
- Closing costs: $200,000 x 3% = $6,000
- Market prep costs: $5,000
- One month PITI (holding cost): $1,000
The total is ~$52,000. Most class "A" investment properties in Las Vegas sell for between $150,000 and $230,000.
Our clients typically spend one day initially on site with us to understand the market, the process, view sample properties, and meet with the property manager. Once the property is acquired, they typically spend 15-30 minutes a month to review the monthly statements provided by the property manager.
Risk comes in many forms. We divide investor risk into the following categories:
- Legal risk - A tenant sues you.
- Price risk - you pay too much for a property relative to the rent and cannot make a profit.
- Vacancy and rent rate risk - You can't rent the property at a profitable price now or in the foreseeable future.
- Rehab risk - You expected a $2,000 rehab and you are now looking at a $20,000 major rehab.
- Maintenance risk - You have large unexpected repair cost like having to replace the AC or the roof.
- Tenant risk - A tenant stops paying rent and you cannot get them out and they damage the property.
In an article titled Risk Management we discuss the measures you can take to control each type of risk. Remember that as long as you buy investment real estate in a good area, all but the worst mistakes will be corrected over time through appreciation, inflation and rent increases.
In this article we covered the money, time and risk you should expect with purchasing an investment property. The numbers used in this paper are for typical single-family and select town home investment properties in Las Vegas.
Want to know more about investing in Las Vegas real estate? Contact us today. You will be glad you did.
Eric Fernwood, Realtor | 702-358-8884 | EricFernwood@gmail.com
Cleo Li, Realtor | 512-296-0425 | CleoYLi@gmail.com
Vegas International Properties Group (VIP Realty Group)
7570 Norman Rockwell, Suite 140
Las Vegas NV 89143