Property investment for those who are doing it for the first time can be a challenging endeavor. If you are considering investing in rental property in Santa Clara County or San Jose, you know about the high costs that are part of living in the Bay Area. There are many things you need to take into consideration when you’re thinking about becoming a property investor.
The Costs of Being a Property Investor
One of the most important questions to ask before purchasing an investment property is whether or not the rental income you obtain from the property is enough to offset all the costs and provide you with a profitable return on investment. Buying rental property is a big decision and one that shouldn’t be taken lightly. It can definitely be a profitable endeavor – however all of the issues need to be addressed before purchase. You can get valuable information from doing research online, talking with local real estate agents and an experienced and knowledgeable San Jose property manager. Below are the cost items you need to answer before purchasing a rental property either locally or anywhere in the country.
- Initial down payment
- Property Management
- Home Owner Association fees (usually with condos, town homes and multi-family properties)
- Property taxes
Balancing Income and Costs
A large down payment will help lower the monthly mortgage payments on your first time rental property. Typically, at least 20% of the sale price (in cash) is required to qualify for a conventional residential loan on an investment property. Talk with the loan officer at a bank or credit union to determine the down payment that would be required and the loan amount you would qualify for. The higher the down payment, the lower your monthly mortgage, however with an investment property you need to balance this with the monthly income as well as the costs of owning the property. An investment property should provide a positive monthly cash flow at the beginning when all the income and costs are included. The appreciation of the property is secondary consideration since recent history has shown that local property values don’t always rise, and rents can sometimes drop.
The Down Payment Isn’t the Only Cost to Consider Before Buying
Property insurance is another cost that also needs to be considered. You can look at the past history of insurance costs and any claims filed on your potential purchase to get an idea how much your property insurance will be. It is important to know about any geographic or natural hazards that exist where a property is located. Areas subject to floods, landslides, as well as earthquake coverage in the Bay Area, are items that increase the cost of your property insurance. Talk with a local insurance agent to get information on the costs of property insurance for the specific type of rental property before you buy it.
Managing the Property
It isn’t easy being a rental property owner – especially in the Bay Area and Santa Clara County where the cost of living is very high. When you own a rental property it needs to be managed. This includes finding and qualifying potential tenants who are dependable and have the financial where-with-all to keep current with their rent. Lloyd Kipp a San Jose Property Manager with more than 35 years of experience found that most first time rental owners (and many experienced ones) don’t have the knowledge and/or time to full qualify potential tenants on their own. He tells rental owners that the key to having a profitable rental property is good tenant selection and retention.
Maintenance cost is another consideration to make before signing on the dotted line. The costs of maintaining a rental property can vary a lot depending on the age, the type of property and history of how it was maintained. Many first time buyers tend to underestimate the maintenance costs of owning an investment property. The appearance of a property does not provide enough information to know what the maintenance costs may be. Before you make an offer on any property, ask for the owner to provide a home/property inspection report from a professional home inspector. This report will provide detailed information on issues with the property that need to be fixed, how well the property was maintained and can save you from big costly maintenance issues. When you own an investment property it’s important to maintain it property and keep your tenants happy.
While maintenance costs for condos and town homes are usually less than that for single family homes, part of the maintenance costs will be from Home Owner Association (HOA) fees. HOA fees can vary a lot depending on the association, age of the building(s) and other factors. You need to know not only what the current HOA monthly fees are, but also get a history of how much the HOA fees have changed over the years. This is another expense you may not have thought about when you decided to invest in rental property.
Property taxes are a fact of life for all property owners, and must be included when you factor in your expenses versus return on investment. In Santa Clara County property taxes will be based on your property’s assessed value and tax rates that apply to your property address. Although the average effective property tax rate in Santa Clara County is low the property taxes are high since the property values are high. You can get an estimate on the property taxes based on the sale price of a property by going the Santa Clara County, CA property tax calculator on the Smart asset site. You can also look up the current and historical property taxes are for a property in Santa Clara County by entering the address on the Santa Clara County Tax Assessor site.
Work With an Experienced and Knowledgeable Property Manager
If you own a rental property in Santa Clara County, you don’t have to worry about issues associated with managing your property. An experienced property manager can work on the details of finding and renting to qualified tenants, maintaining the property, as well as keeping records for tax purposes. Being a successful property owner takes experience and time. If you are a first-time rental property investor, you will appreciate the knowledge that a property management team can give you.
Valley Management Group is a property management company with over 35 years of experience working with rental owners in San Jose and throughout Santa Clara County. They have high customer approval ratings from both investment property owners and tenants. If you need an experienced San Jose property Manager to take care of your property and your tenants in San Jose or elsewhere in Santa Clara County, contact Valley Management Group for a free quote and one free month of property management services.
Reviewed and Approved by Lloyd Kipp
Property Manager and Owner of Valley Management Group