With many big finance experts recommending real estate investing as one of the best forms of investing for great returns, it can be tempting to think that this is a quick and easy path to wealth building.
While the rewards can absolutely be significant, it’s also important to understand that investing comes with costs, especially for those who are new to it.
Real estate experts explain what unexpected expenses to plan for when you begin investing in real estate.
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Agent Fees and Closing Costs
While most people know they need a real estate agent’s help to buy or sell a property, they might not realize these agents typically take a 5% to 6% commission off the sale price, said Michael Branson, CEO at All Reverse Mortgage. Then there are closing costs, which can range from 2% to 5% of the purchase price. “These include fees for title insurance, attorneys and transfer taxes, all of which chip away at your profit,” Branson said.
Inspections and Appraisals
Before sealing the deal, you’ll need to get a property inspection to uncover any hidden issues like a cracked foundation or faulty plumbing, Branson explained. “If you’re using a loan, your lender will also require an appraisal to make sure the property is worth what you’re paying. Both of these services cost a few hundred dollars and are expenses that come out of your pocket upfront.”
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Holding Costs
If you’re renovating a distressed property or just putting in some needed upgrades, you can incur “lengthy holding costs while they complete repairs,” according to Andy Heller, real estate investor and owner of Regular Riches.
You can minimize these costs pre-purchase by making sure you get a good inspection, and insist on access on the days and weeks after acceptance of the contract and prior to closing, Heller said.
“The investor can use this time to walk the property with the nominated contractor and specialists, finalize all bids and schedule the contractor to start the day after closing,” Heller said. This can all be done on the seller’s dime and can result in a quicker rehab process, thus minimizing holding costs.
Additionally, Heller said that properly researching pricing in advance and marketing the property with the right pricing (ideal rent and fair purchase price) immediately after rehab is completed will typically lower holding costs, as it enhances the likelihood the investor receives a purchase offer or identifies a good tenant faster.
Financing Fees
If you’re taking out a loan to purchase a property, don’t forget about fees that come along with that. There are origination fees (what the lender charges to process your loan), private mortgage insurance (if your down payment is less than 20%) and, of course, interest payments.
“If you’re holding onto the property long term, interest alone can significantly impact your bottom line — especially if interest rates increase,” Branson said.
Property Management Costs
If you’re renting out a property and choose not to manage it yourself, you’ll most likely have to hire a property management company, which typically takes 8% to 12% of the monthly rental income, Branson pointed out. “While they handle everything from finding tenants to managing repairs, that fee eats into your cash flow,” he said.
HOA Fees
If you buy a property in a neighborhood with a homeowners association (HOA) you’ll have to pay monthly or yearly HOA fees, said Ray Franz, founder and owner of CharterOak HomeBuyers. “These fees can add up and really impact your budget.”
Pest Damage and Control Costs
Inspections often turn up pest problems that may be costly to fix, Franz said, but it’s better to know about these upfront than to be surprised later on.
“Termites, rodents and other pests can cause big problems and expensive treatments if they go unnoticed. It’s always a good idea to get regular pest inspections to avoid costly surprises later,” Franz said.
Insurance Premiums
Properties need to be insured, and depending on the type of property and its condition, this could be costly, as well. “Insurance for an investment property often costs more than what you pay for your primary residence if the property is vacant or used as a rental,” Franz said. He recommended budgeting for higher premiums to protect your investment.
Vacancy Costs
A cost few people think about upfront is vacancy costs, Branson said. “When renting out a property, it’s not always going to be occupied. Every month that the place sits empty means no rental income, but your mortgage, utilities and property taxes still need to be paid.”
He said it’s critical to account for vacancies in your budget, especially if you’re in a market where demand fluctuates.
The more prepared you are in advance for these costs, the more quickly you can begin to see a return on your investment.
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This article originally appeared on GOBankingRates.com: 9 Unexpected Expenses When You Start Investing In Real Estate
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