Topic 03 · 6 min read
Buying Your First Property
The money you need up front, and the money you forget about.
A purchase takes a down payment plus closing costs plus a reserve for the first surprises. Lenders usually want more down on a rental than on a home you live in. Between contract and keys comes inspection, appraisal, and a pile of paperwork, and each step can change the price or kill the deal.
What to know
- Down payment
- Often 20 to 25 percent on a rental. Less is sometimes possible if you live in one unit of a small multi-unit building.
- Closing costs
- Loan fees, title work, recording, and prepaid taxes and insurance. Budget a few percent of the price on top of the down payment.
- Inspection and appraisal
- The inspection tells you what you are buying; the appraisal tells the lender what it is worth. Either can reopen the negotiation.
- Reserves
- Cash left over after closing. Without it, the first broken furnace becomes a credit card balance.
The tax benefit
Most closing costs are not deducted right away; they are added to what the property counts as costing you, which matters later for depreciation and for the gain when you sell.
Worked example
What $60,000 buys
On a $240,000 duplex, 20 percent down is $48,000 and closing costs run about $7,000. That leaves only $5,000 of the $60,000 as a reserve — thin, but workable.
Watch out for
- Loan approval for a rental is stricter than for a personal home.
- Insurance on a rented property costs more than a homeowner policy.
- Skipping the inspection to win a bidding war is the expensive kind of brave.
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