Watch Out for These Hidden Costs of Property Investment

Before you invest in any piece of real estate, it’s your job to consider all the costs and expenses you’ll incur. Of course you know about the cost of the real property, and you’re aware that there will be other expenses, too - repairs, paying taxes, insurance, etc. But it’s inevitable that a few costs will sneak up on you. These are the hidden costs of investment, and if you haven’t planned for them, they can blindside you.

Closing Costs - Every real estate sale comes with closing costs that can range from 2 to 5 percent of the home price. These include all the fees associated with the transfer of the title from seller to buyer, and may include an application fee, appraisal cost, attorney fee, escrow fee, credit report, title insurance fee, property tax, recording fee, transfer taxes, underwriting expenses and more. Whew, that’s a lot of fees!

Tenant Screening - Screening prospective tenants before they sign a lease is a must, but there are some costs to be aware of. Running credit reports and background checks cost money, and if you’re considering a few different tenants, this can add up.

Bad Tenants - Don’t let the fees associated with screening tenants deter you, though. The true cost of bad tenants is far worse. By bad tenants, I mean people who don’t pay on time or in full and think that damaging your property is no big deal. These renters can dramatically increase your costs over the short and long term, so be selective about who you rent to.

Legal Advice & Services - Investors should always have a good, experienced attorney to consult with when necessary. However, unless you’re best pals with one, it’s going to cost you to lawyer up. Why do you need an attorney? For lots of reasons. There are legal complexities associated with everything from setting up an LLC to liability insurance to tenant eviction. Bottom line: make sure you budget in the cost of legal counsel before launching your investment business.

Sneaky Repairs - Sneaky repairs aren’t like regular, obvious repairs, such as the furnace going out or needing to fix a hole in the wall. Sneaky repairs refer to that toilet that’s been running nonstop, but your tenants have failed to mention it. Or those gross bugs they’ve been noticing around the foundation, but also didn’t inform you about. Now you’ve got a busted toilet, crazy water bills, and a termite infestation! Avoid these by performing periodic maintenance checks and regularly communicating with your tenants about what’s going on at the property.

Vacancy - This one’s a biggie. Vacancy is no joke; every month that your property sits empty is a month you’re paying the mortgage out of your own pocket. With no renters providing income, you’re operating on a deficit that can drain you financially unless you’ve planned for it. In addition to this, you’ll also need to act immediately to get the unit rented. Depending on the advertising strategy you use, these marketing efforts may also wind up costing you.

Working with the Wrong “Partners” - Real estate investment is rarely a solo endeavor. Even if you don’t have any official partners, you’re still working with other people throughout the process. This may include lenders, contractors, insurance agents, realtors, and others. If any one of these individuals doesn’t have your best interests in mind, it can do real harm to you and your business. Make sure you can trust the people you work with, and that each is acting fairly and ethically in all your dealings.