As a new real estate investor, you’re probably very excited by the prospect of building an almost endless wealth. Deciding to be a real estate investor is a substantial choice resulting in countless investment opportunities. It takes a special person to follow this path, and we’re happy to walk it with you. To help you prepare for the journey ahead, we’ve compiled a list of several costs associated with real estate investing that all new investors should consider.
1. Closing Costs
Closing costs can be considerable, and they add up quickly. Separate from the purchase price of the property, closing costs are a part of every real estate transaction. Included in closing costs are fees such as loan origination fees, homeowner’s insurance, transfer fees, government recording fees, and broker commissions. Every real estate investor needs to consider these costs when negotiating the purchase of a property, because they can be a deciding factor in whether to go ahead with the deal or look for something less expensive.
2. Taxes
As with any other form of income, the income from your real estate investments is taxable. You will probably pay your taxes once a year, so it’s important to set money aside for the expense. Investors selling an investment property may be eligible to use a 1031 Exchange tax break to defer tax liability to a future date.
3. Unanticipated Repairs
While many issues with a property can be detected with a home inspection, there are those that go unnoticed until after the sale has gone through. For instance, mold or water damage inside the walls can easily be missed, as can any underground septic or sewer problems, too. If unexpected repairs pop up after you buy a property, it’s your obligation and financial responsibility to address them, so having extra funds set aside is always a good idea.
4. Hiring Property Management
As a new real estate investor, you probably have plenty of time to manage a single property and work a full-time job. As your investing business grows, however, it can become very difficult to manage it all yourself. Hiring a property management company to assist you with the daily tasks of managing your rentals is an option. You can expect to pay a company like this up to 10 percent of the monthly rent the property takes in as well as additional fees if they have to find new tenants for vacancies that occur.
5. Vacancies
If you use your investment property as a rental unit, there will be times it stands empty. This vacancy can lead to substantial financial loss in two ways: no profit coming in from monthly rent payments, and out-of-pocket mortgage, insurance, and property tax payments with no rent coming in to cover them. If you anticipate ahead of time the probability of vacancies due to time needed for repairs or lack of tenancy, you can put aside a nest egg that covers the costs until new tenants move in.
There’s no doubt that being a real estate investor is a lucrative business. However, as a new investor, you must be aware of the considerable costs of starting out. Planning ahead and understanding the costs associated with investing in real estate can help you build a successful business.
