6 Surprise Costs of Investing
Investing in real estate is certainly one of the best ways to grow your portfolio and, subsequently, your wealth. However, for new investors, it’s crucial to keep an eye out for a few hidden costs that you may not be expecting.
Unexpected repairs. Sure, a home inspection gives you some peace of mind. But a routine inspection will not necessarily catch every single problem a property may have. What about weaknesses in the plumbing that can’t be seen without tearing up the floors or the yard? Major leaks can cost hundreds or even thousands to fix, and you can’t always be sure they won’t happen.
Vacancies. Adding insult to injury, sometimes vacancies are forced due to necessary repairs – further costing you as the owner. Or maybe the property simply didn’t rent out. Vacancies are a double loss because not only are you left with the mortgage payment, you’re also missing out on your profits. Ouch!
Opportunity cost. You looked at multiple properties. You did your research. You thought about it long and hard. But the simple truth is that nobody knows what the future is going to hold, and you may not always end up with the most profitable property. That, my friend, is opportunity cost, and it will always be there when you make an investment purchase.
Property management. If you don’t have the time to tend to your property at all hours of the day (and let’s be honest, who does?), especially when you have multiple properties or a large number of units, it might be time to hire a property manager. this will usually cost you about 7-10% of monthly rents, but can potentially save you a massive headache. For new investors, it can be tempting to try to do it all yourself – from repairs to finding tenants to collecting rents and so on, but at some point it might be time to hand off some of your responsibilities to someone else.
Taxes. When tax season comes around, be sure to set aside a lot more money for taxes than you might think you’ll need. Capital gains taxes take out a large percentage of your profits, and you need to be prepared. Consider exploring 1031 tax exchange options – this keeps all of your money working for you rather than leaving you.
Closing costs. Just because you’re in escrow doesn’t mean you get to relax quite yet! Settlement costs often take new buyers by surprise. Loan origination fees, discount points, appraisal fees, title searches, insurance, or deed-recording fees are just a few examples.
Real estate investments are a massive commitment and will require lots of hard work. In the beginning you’re bound to make a few mistakes, some of which can be costly, and at times you will be frustrated. But the good news is that investment real estate can be an extremely rewarding experience and can offer high returns – just be sure to always keep your eyes open in case anything goes wrong. And, of course, keep your emergency fund for backup.
Want to keep your money working in your favor?Let Lyon | Stahl‘s 1031 Tax Exchange experts guide you on making the most of your investments!