All-in cash to get one house closed and stabilized, realistically

Question

I do due diligence on passive positions for a living and I've somehow never bought a house myself, so I'm trying to build the cash requirement from the bottom up rather than trusting the 20 percent down figure everyone quotes.

Say a $250,000 house. 20 percent down is $50,000. But then I've read about closing costs somewhere between 2 and 5 percent, an inspection, whatever the house needs before a tenant will pay full rent, and some kind of reserve. Somebody on another forum said budget 30 percent of purchase price total and you'll be close. Somebody else said that's wildly conservative and you'll be fine with 25.

What are the actual line items and roughly what does each one run? I'd rather over-plan the cash than get to month three with a dead water heater and nothing behind it.

Rena Guide · Accepted Answer

Here are the lines on a $250,000 purchase, using round numbers.

Down payment on an investment property is commonly 20 to 25 percent, so $50,000 to $62,500. Lenders price investment loans differently from owner-occupied, and the exact minimum and rate are things to confirm in writing with your lender rather than assume.

Closing costs typically land in the 2 to 5 percent range, so $5,000 to $12,500. That bundle includes lender fees, title work, an appraisal of maybe $600 to $900, and prepaid taxes and insurance going into escrow. Transfer taxes are part of it too and they vary a lot by state, from nothing to over 1 percent, so ask your title company for a written estimate for your county.

Inspection runs roughly $400 to $700 for a standard house. A separate sewer scope is another $150 to $300 and is worth it on anything with mature trees.

Make-ready is the line people underestimate. Paint, cleaning, locks, minor repairs on a house that shows well might be $2,000 to $5,000. A house that needs flooring and appliances is $10,000 and up.

Reserve is the last piece. I'd hold six months of the full monthly cost, mortgage plus taxes plus insurance, plus enough for one large system. On a $250,000 house, one HVAC replacement is $8,000 to $12,000 and a roof is $12,000 to $20,000.

Add it up and you're in the $70,000 to $90,000 range, which puts the 30 percent rule of thumb roughly in the right place.

The cost nobody warns you about is the vacancy between closing and the first rent check. If it takes six weeks to make ready and lease, you're paying the mortgage out of pocket for two months with no income. Budget that as a real line, not as a surprise.

kevin_lombard · Answer

The sewer scope detail surprised me. Is that standard practice or only in certain areas? I'd assumed the general inspection covered drains.

jessreyes12 · Answer

@juniper it's separate almost everywhere. General inspectors run water and check for slow drains, they don't put a camera down the lateral. On older housing stock with clay pipe the repair is $5,000 to $15,000 depending on whether they have to open the street, and in a lot of cities the lateral from house to main is the owner's problem, not the utility's. Cheapest $200 anyone spends.

nataliehsu · Answer

Add appraisal reinspection to the list if anything gets fixed as a condition of the loan. It's usually $150 to $200 and it also adds a week.

laurenkim53 · Answer

The percentages get weird at low price points, which is where I keep looking. On a $95,000 house the down payment is $19,000 but closing costs don't scale down proportionally, title and appraisal and inspection are close to flat dollars. So my all-in is more like 38 percent of purchase price, not 30. And the reserve for one HVAC is the same $10,000 whether the house cost $95,000 or $250,000, which is a much bigger bite relative to rent.

hannah_west29 · Answer

@hollow that's the real argument against the cheap-house yield story and it never shows up in the gross yield tables. Fixed dollar costs against a smaller rent line. My version of the same problem: management fees are a percentage but the manager's actual labor per door is flat, which is exactly why good managers don't want scattered cheap houses at 8 percent.

@canton one thing missing from your list. If you're buying with a loan, the lender will likely want to see reserves in your account at closing, separate from your down payment and separate from whatever you plan to spend on make-ready. So part of that $70,000 to $90,000 has to be sitting still and provable, not deployed. Confirm the exact reserve requirement with your lender before you commit any of it.

brandonlee36 · Answer

The thing that actually broke my planning was insurance. I budgeted off the seller's declaration page and the quote came back nearly double because the seller had a legacy policy and a long claim-free history that didn't transfer. Get your own quote during the inspection period, on a landlord policy, with the loss of rent coverage you actually want. And ask what the deductible is on wind and hail separately, because in some states that's a percentage of dwelling value rather than a flat number, which is a $10,000 deductible hiding in a policy you thought had a $1,000 deductible.

All-in cash to get one house closed and stabilized, realistically

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