Morris Invest: Buying Your First Rental Property and Start Up Costs
Articles Blog

Morris Invest: Buying Your First Rental Property and Start Up Costs

Case study. In today’s episode,
we’re deep-diving some of the behind-the-scenes
start-up costs associated with getting started
with rental real estate. Hey, everyone. I’m Clayton Morris, the
founder of Morris Invest. And today we’re enjoying a
little outside podcasting– video-casting– out here. It’s too beautiful
on this spring day to be inside a studio. So hopefully the wind
won’t pick up too much and it won’t be too bad. But today on the
show, we are going to deep-dive the questions
around getting started with real estate investing
and some of those hidden costs that people don’t think
about when they’re setting up and getting started with
their first rental property. So we’re going to dive into
some of those suggestions and questions today. And there are
probably other costs that may be out there that I
might not have thought about, but these are the costs that
my clients at Morris Invest and I personally have
to go through when I’m buying a new rental property. We’re not talking about
commercial property and we’re not talking
about other assets that we’re picking up. I’m specifically talking
about the types of properties that I purchase, the
types of properties you know that my company does,
those single-family homes, three bedroom, one
bath in the Midwest, the prices are going to be
right around that $40,000 mark. That’s my bread-and-butter
properties that we do. So given that as a ceiling on
what types of properties I buy, let’s dive into some
of those case study costs that you could
expect when you’re buying your first rental property. Now, of course, the
purchase of the property is going to be a cost, right? You’re paying cash
for the property. Now, cash can be any
number of things, right? It could be you borrow
money from your 401K. I’ve got videos and sessions
right here on the channel all about how to do that. It could be that you’ve
got money in savings, so you’re buying it out
of your savings account. It could be you buy it
from a self-directed IRA. Maybe you’ve got private
funding that you take on. Any number of ways that
you acquire that property, those are going to be
costs, of course, associated with buying that property. We get that, right? The purchase of the
house, that’s an obvious– that’s an obvious one. But what are some
of the hidden costs associated with buying
rental properties? Let’s start with
the most important, setting up your business entity. Now, I’m going to put
up the white board here. If you’re watching on the
video version of this, I’m going to put
up the white board and go through
some of the costs. But if you’re
listening to this, I’ll break them down as equally
important so you can hear them and jot them down as well. So an LLC– now, this
is going to be different depending on where you’re
purchasing or setting up your LLC. I’ll give you a
couple of examples. In the state of Indiana, where
we do a lot of our properties, you’ll just go to the state’s
department or state website, and you can set up an
LLC for about $100, $125. You could also use a
service like LegalZoom, something like that, but it’s
going to cost you about $300. You could use a website called– for instance, in Florida,
it could be, I think, Or in Michigan, we could
work with an attorney there to set it up very
quickly, and that’s going to be about $300. So the range on setting up an
LLC or your business entity is going to be
between $100 and $300. Now, that’s going to be
typical across the country. However, if you’re setting
up an LLC in California– which, again, I
wouldn’t recommend investing in California. That’s not my bag at all. Costs are way too high. But investing in California,
setting up an LLC can be about $800. You can tell that the California
government really wants people to do business in their state. Another hidden cost,
or one a lot of people might not think
about when they’re buying their first
rental property is the insurance on the
rental property itself. Now, of course, these
things can change. And they can cost different
things in different areas. And it depends on
how much coverage you want to get on
your rental property. For each of the properties
that I personally buy, my wife and I typically
will put about– it’s around $400 to $600
a year for rental coverage and liability insurance on
our properties. $400 to $600, that’s a good rule of thumb, a
good range that you can expect to pay for your insurance. Now, sometimes it could
be a little bit less if you don’t get as much
coverage as maybe we do. And it can be a
little bit more if you want more of a Cadillac policy,
as some people will call them. Maybe replacement
costs are higher. But for me, on a property that
I’m buying that I’m paying $45,000 for, and it’s
worth $50,000 or it’s worth $45,000-ish or
$48,000 or $49,000, I’m going to get a replacement
plan coverage of about $50,000. I’m not going to try to twist
the arm of the insurance company and try to
get them to get me replacement costs of $75,000. They’re never going
to go for that. So the replacement is just
going to be a little bit more right around the value
of that property, so that I know if, god
forbid, there’s a fire and the place burns down, I can
rebuild it for the replacement value of property. Easy peasy lemon squeezy. So there we go. We’ve got LLC and
we’ve got insurance. Now, you also want to take
into account setting up a business checking account. Why? Well, when you
incorporate as a business for your rental
properties and because of the tax benefits of
owning rental properties, you’re setting up your LLC. Well, you don’t want to
then take your rent payments to yourself, John Smith. That would be idiotic. Why? Why would that be idiotic? Well, it’d be idiotic
because then, of course, you’re going to end up paying
way higher in your taxes. You’re taking the money
as a sole proprietor, as an individual,
when the LLC was– is the company that
actually owns the property. If Johnson Holdings
LLC owns the property, why would you get a check made
out to you as Bill Johnson? It would make no sense. So you want the
monthly rent check from your tenants made out
to Johnson Holdings LLC. And therefore, you go
down to your local bank. You set up a business checking
account with that LLC name as the ownership of that. And to set up a business
checking account, all you need are two things. You need your
incorporation documents from setting up your LLC, and
you’ll need your EIN number. And EIN number is your
Employment Identification Number. And you get that
from the IRS website. So just go over to It’ll ask you for your
incorporation information from your LLC, and they’ll
spit out an EIN number. You take those two things down,
you go right down to the bank, and you set up a business
line of checking, or you set up a business
checking account. And you can then start
to take direct deposits from your rent inside of
that checking account. Now, a word of caution. We used to have our
business checking accounts with some large– a large bank. I won’t name names,
because they may have changed their policies. They may have changed
up a few things. I don’t know. But typically, with
the large banks, you’re going to pay
for business checking. You’re going to pay fees
for business checking. So we decided to
swerve our plan and we started using local banks for
our business line of checking. Why? Because now it’s free
and they don’t charge us. So it could be a cost. That’s why I put
it on this list. It could be a cost. But it’s not necessarily going
to be a cost if you do it right and you shop around. A lot of local small banks,
in order to compete with those larger banks, will have
their business lines– their business checking accounts
super cheap and almost free– typically free, so they can
compete with the larger banks. We’re in New Jersey,
so we use a local bank called Lakeland Bank. And they’re fantastic. And we have multiple
accounts with those– we have multiple accounts
with those companies. They’re fantastic. Yeah, we have multiple
accounts with Lakeland Bank. And they’re really,
really great. So again, that’s a cost that
you may incur or you may not, depending on which bank you use. All right, another one
is the property itself. We talked about, of course,
the purchase of the property. And then you’re
going to then have to pay closing costs on the
purchase of that property with your title company. So typically, your
title company will– our typical title
company closing is anywhere from
$300 to $500, right? It could be a little bit more. But a good rule of thumb for
closing for a rental property– or for a purchase of that price
around the $40,000, $50,000, $60,000 range– it’s going to be anywhere from
$300 to $500 in closing costs. That covers title insurance. That’s title insurance
with your title company, and that’s them running the
title search for the property, and then, of course, recording
the deed with the county so that your property is
on record with the county as you owning that property. All right, one more cost that
some people don’t think about. And this is not true of every
market across the country. We’re in certain rental
markets where you have to pay a landlord license. I know that sounds crazy. I need to get a license
to be a landlord? But yes, indeed. If you’re in Michigan and you’re
in some other markets where I own rental properties,
at the township level, they will mail you– after
you close on the property, they’re going to mail
you a letter that says, please fill out your
landlord license information. And this typically costs
between $100 and a $150. In Michigan, I think it’s $125. But again, this is something
that you’ll pay for yearly. It’s a pain. I know. It’s stupid. It’s the state’s way
of, again, trying maybe to have you do business there. I don’t know. I never understand what
goes through the minds of bureaucrats in these states. You want to encourage
business growth? Get rid of the landlord
license, $150 fee. I’m going to go in and
renovate this property and make this old, dilapidated
house beautiful again and improve the neighborhood and
place a tenant in the property, and you’re going to
charge me for that? Come on. You know what? Maybe I’ll just let
that house sit vacant and rats will run around in it
and it will become an eyesore on the neighborhood. So again, a landlord license– figure that as part of
your overall fee structure when you’re running
your numbers. So there you go. We’re out here in
the wind, taking stock of some of
those hidden features. And I hope it wasn’t
too windy for you when you’re listening on the
audio of this, of the show today. But let’s recap
some of these again. So setting up your LLC
or your business entity for purchasing real estate. Next up, insurance
on the property. You’re going to want to take
out insurance on the property to protect yourself
for liability purposes and replacement costs. Setting up a business
checking account– you’re going to want to do that. Some may be free. Some might cost you a
little bit in a yearly fee or a monthly fee to have
that checking account. Number four, the property
itself, of course, purchasing the property
along with the closing costs, the title search, and
those sorts of things associated with the title
company and the deed recording. And then finally,
a landlord license, which your mileage may vary
on that particular thing, because you may find
that, in your area, you don’t have a
landlord license. For instance, Indiana, I know
we don’t have landlord licenses. Florida, we don’t. I believe I need one
in North Carolina. I think I have one
in Pennsylvania. I think I have one in Michigan. So again, your mileage may
vary depending on those costs. But when I look
at the properties that I buy, honest to
goodness, hand to the heavens, these are the costs. These are the upfront costs
of buying a rental property. There are no other costs. Of course, you’re
filing your taxes at the end of the year
with your accountant, but that’s not really the cost
of buying a rental property. So when I look at these overall
costs, this is what it is. This is what it is, right here. It’s these four or five things,
depending on your territory. And that’s the beauty
of rental real estate, that if you do it right and
you know what you’re doing, if you work with a
company like ours or if you book a call with
our team at Morris Invest, we’ll take care of you. Or if you’re doing
it on your own, of course, then you’re going
to have to pay for labor and you’re going to have
to do those other things. Well, the bell is ringing
here at the local church. So I guess that means
we’re out of time. Thank you so much for
downloading and subscribing to the podcast– I really appreciate it– and the show, the Investing
in Real Estate show. Of course, we publish
multiple times a week. And we want to thank you
so much for subscribing. Now, I just want
you to go out there and take action and become
a real estate investor. And the bell– it
tolls for thee.

Leave a Reply

Your email address will not be published. Required fields are marked *

Back To Top