Real Estate Investing Basics

Commonly Overlooked Costs When Buying Your First Property (Don’t Get Caught Off-Guard!)

Expertise: Real Estate Investing Basics, Personal Development, Landlording & Rental Properties, Real Estate News & Commentary, Business Management, Flipping Houses, Real Estate Deal Analysis & Advice, Personal Finance, Real Estate Marketing
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Let’s talk about some of the costs you need to remember when purchasing your first investment property. 

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OK, for all of my newbies out there, this one is for you. You saved some money, caught the real estate bug, and you’re about to enter the wonderful world of real estate investing. So here is a bit of caution for you from someone who has been there and done it. I’ve done a lot of deals, and I’m currently running a lot of investment companies.

Guys, it’s not all fairytales and butterflies. Real estate investing is hard work. 

Where New Real Estate Investors Go Wrong With the Numbers

I’ve seen a lot of investors make mistakes when it comes to numbers. What I mean by that is the numbers that you use to calculate a return on investment, the numbers you use to figure out what to buy a property for, and the numbers associated with leaving a margin of safety when it comes to acquiring a property for a specific price. I’ve seen mistakes when it comes to owning and holding a property for the long-term.

I’ve seen a lot of investors investing more money than they can afford to lose. When you commit your money to a buy and hold property, or a buy, fix, and flip property, and an emergency strikes, if you need access to that capital, it’s just going to dampen those plans. You’re going to have to liquidate out of that as quickly as you can, at a loss, and lose money to cover the cost from a personal standpoint.

Never commingle the two. I want you to keep your personal funds separate for any emergencies, and only use what you can comfortably afford to lose for investing purposes. If that is buying, fixing, and flipping, if that is buying, fixing and holding, if that is buying and holding—whatever that is, only invest what you can afford to lose.

That’s my word of caution for you guys. 

Common Miscalculations in Real Estate Investing

Now, some of the costs associated with buying your first investment property that a lot of investors don’t realize because they get caught up in a pro forma or caught up in the potential of that particular deal is the business side.

Close up view of bookkeeper or financial inspector hands making report, calculating or checking balance. Home finances, investment, economy, saving money or insurance concept

LLC Costs

If you’re thinking about building a large portfolio, you may want to think about starting a limited liability company or LLC, but there’s a cost to make that happen. You’re going to have to pay filing fees and a good attorney to whip that up for you.

Plus, every state is different. You can also do it online yourself, but I don’t suggest that. I suggest that you do enough networking and research to find a good attorney that can assist you long-term with your real estate endeavors. That’s a cost that you’re going to have to pay for. 

Related: 3 Reasons NOT to Buy an LLC Online

Closing Costs

Another cost that a lot of investors don’t understand is closing costs. This will be something associated with every property that you buy. There is title insurance, title fees, and recording fees. In some states, you have to pay an attorney to do the closing on that transaction.

Insurance Costs

There are insurance costs associated when you’re renovating a property. There are also insurance costs with properties that you are buying and holding. Do not forget to get insurance. It is very important that you get insurance, because if you think something bad is not going to happen to you, I’m here to tell you that it will. 

The Bottom Line

As an investor, you always have to base your decisions on a worst-case scenario. Always paint an ugly picture—once again, it’s not fairytales and butterflies. Then, if everything makes sense, the investment may be worth pursuing further. So, those are some of the costs associated with buying your first property, from setting up an LLC to insurance costs to various closing costs to filing a tax return.

Related: The Ultimate Guide to Real Estate Taxes & Deductions

You’re going to have accounting expenses for the LLC that are going to be different than your personal expenses. You’re probably going to need to hire a bookkeeper to do your books, P and L, and balance sheet. These are some costs that a lot of investors don’t know up front that they will incur as they expand their real estate portfolio. 

I want to finish off by saying this: No matter what you’re looking at investing in or whatever specific niche within the real estate industry, I always want you to underestimate your income and overestimate your expenses. Because if you make any mistakes along the way and forget to include some of the costs that I’ve mentioned, you’re always going to leave yourself a buffer for the unknown.

You will make mistakes. There are no ifs, ands, or buts about it. I make them every single day, and I know that as long as you work hard and you try, you’ll succeed. But you’ll also make mistakes. 

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Are there any unexpected or often forgotten costs associated with buying real estate that I’ve left out? 

Add them in a comment below!

 

Engelo Rumora, a.k.a."the Real Estate Dingo," quit school at the age of 14 and played professional soccer at the age of 18. From there, he began to invest in real estate. He now owns real estate all over the world and has bought, renovated, and sold over 500 properties. He runs runs Ohio Cashflow, a turnkey real estate investment company in the country (Inc 5000 2017 & 2018) and is currently in the process of launching a real estate brokerage called List’n Sell Realty. He is also known for giving houses away to people in need and his crazy videos on YouTube. His mission in life is to be remembered as someone that gave it his all and gave it all away.

    Wenda Kennedy JD from Nikiski, Alaska
    Replied 2 months ago
    I start by creating a budget, line by line. My estimates are toward the higher end of the cost range. I then add a 20% "oops" factor to each line. That 20% is my wiggle room. I assume that things are going to go wrong -- there's always something. If they go right, I am pleasantly surprised. Any remaining money from each step, including the 20% monies, is then allocated to an emergency fund to be shifted as needed. Running out of money in the middle of a project can sink the whole thing. Cash is king!
    Mark JOhnson Investor
    Replied 2 months ago
    Also remember that if the insurance underwriter doesn't like something even after your insurance policy starts, they can demand it be inspected by a trade expert for compliance, repairs, Etc or else they will cancel policy. Not so good especially I'd you have a mortgage requiring insurance. Hope you have my funds for this just in case.