Real estate investing is becoming more and more popular these days, and for those who do it the right way, it can be extremely rewarding and lucrative. But before you can seal the deal, it’s essential to ensure that the benefits of a property outweigh the costs, and you can’t do that without considering hidden costs. If you’re just getting started on your real estate journey or aren’t far along yet, knowing to look out for these eight hidden costs can make a big difference for your business.
Maintenance and Repair Costs
If your main goal out of investing in a property is to rent it out, then you can’t forget about the cost of maintenance and repairs. There are many methods people follow for putting aside money for maintenance and repairs. A good recommendation is expecting to spend at least 10% of the gross monthly rent on maintenance and repairs per year.
Unfortunately, maintenance and repairs can’t be avoided. Over time, if a property is neglected either by the owner or the tenants, its value decreases, and it becomes harder to find new tenants, leading to an overall higher cost. As a sub-note of maintenance and repairs, if you plan on cutting these costs by doing your own maintenance and repairs, make sure to at least factor in the cost of quality tools. Without the right tools, the job can end up costing you even more.
As a renter, insurance is relatively low and not a major concern, but when buying a property, insurance is more costly. Depending on the location of the property, you’ll need multiple types of coverages. For example, if the property is in an area susceptible to flooding, you’ll need flood insurance. Furthermore, as a real estate investor, if you choose to use the property as a business, you’ll need liability insurance as well as a business umbrella policy.
When you buy a property, you’ll also have to pay a land transfer tax or the fee for transferring property ownership. Whatever you do with a property, as long as you own it, you’re responsible for property taxes and school taxes. Depending on where the property is located, these taxes can be substantial. It’s best practice to reach out to the local municipality and ensure tax prices are the same as those listed for your property before you close. It’s also useful to find out what those taxes cover.
You might not think of mileage as a significant cost, but it can add up. As a property owner or manager, depending on what you do with your real estate investment, you can be spending a lot of time driving and stacking on the miles. There are visits back and forth to the property, maintenance visits, showings, and much more that will tack on the miles.
If your real estate investing goal is to rent out a property, then you must factor in vacancy costs. In the case of rental properties, it’s smart never to assume your property will be rented out for all 12 months. It’s in best practice to learn your market, and what the average vacancy rates are, so you can calculate rent prices and set money aside accordingly. When it comes to vacancy costs, in addition to the lost revenue while the property is empty, you also need to consider the cost of preparing the rental for a new tenant.
Tenant and Buyer Search
Whether you’re looking to rent out a property or flip it, you’ll have to spend some money on finding a tenant or buyer. From advertising to paperwork and more, these expenses can quickly add up. Many rental owners charge application fees for tenants, to combat costs of tenant searches. If you plan on using a property management team to help find tenants or a real estate agent to help find buyers, that’ll be an additional cost for you to consider.
As a real estate investor and rental property owner, if providing amenities doesn’t help you secure quality tenants or market rents, then it might not be the best option. Amenities come with added hidden costs such as more insurance, higher maintenance fees, and the cost of providing the amenities. It’s best to match your amenities provide to your tenant base, competitors, and market.
With the popularity of Airbnb and similar applications, a popular and lucrative real estate investing option is renting properties to short or mid-length visitors on these applications. When listing an apartment on an app like Airbnb, it’s essential to consider the cost of furnishing. People interested in these stays want comfort and style. Those who are renting properties short term in this way, for travel or business, also will expect amenities to be included.
Tips for Mitigating Hidden Costs of Real Estate Investing
The first step in mitigating the hidden costs of real estate investing is understanding that there are hidden costs, so you’re already well on your way. These tips can help reduce the costs associated with real estate investing:
- Conduct real estate market and investment property analysis
- Minimize turnover (find quality renters and do what you can to keep them!)
- Take advantage of tax breaks (deductions, capital gains, depreciation)
- Join a real estate partnership
- Use investment property calculators
- Underestimate income and overestimate expenses
- Minimize vacancy (focus on long-term tenants when possible)
- Reduce marketing expenses via social media and automated email marketing
Getting the Most Out of Real Estate Investing
As cliche as it is, you really do need to spend money to make money. But with real estate investing, it doesn’t mean you have to overspend. With the right tips and strategies, you can increase your profits while lessening your costs and stress, to get the most out of real estate marketing. There is always a way to reduce costs, and if the cost of one thing can’t be lowered, then other costs can be reduced to make up for it. The first step in minimizing real estate investing costs is understanding all of them, and that includes the hidden costs.