Out of pocket expenses. Why is no one talking about

Out of pocket expenses. Why is no one talking about

NJ · Member since 2019 · 61 posts · 19 votes

Through my time researching, especially nowadays, repeatedly I have come across articles, YouTube videos, books, ebooks, blogs, etc etc on investing in REI with 'little to none' of your own money. Discussions around hard money, private money, and conventional loans are discussed. However there seems to be MANY fees/costs where the investor will be responsible for...? Or at the very least, (1) consider getting a loan to cover these expenses and/or (2) be mindful of these unexpected costs throughout the project.

Pre-Deal

Marketing fees, training, learning market, travel time including gas mileage, costs for purchasing legal forms & contracts, fees to start an LLC

After Rehab Deal is Accepted

HML origination fee, HML points, Buyer closing costs, down payment, title company, local taxes (transfer tax, prorated property tax,etc)

After Buyer Closing

Dumpster rental & permit from town, buiilding permit for construction, monthly holding costs to pay back HML, homeowners insurance, repair expenses prior to being reimbursed from HML, Marketing fees to promote 'coming soon', dream team fees such as CPA, attorney, and fees to pay for the SOW inspection

Seller closing

Seller contributions, agent commissions, prorated property taxes, title company, attorney fees 

4Reply
56 views

Most Popular Reply

Jonathan GreeneBusiness Member
Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
6y

All that means is that you are getting your advice from the wrong people. Sometimes when you are looking for things like "how to invest with no-money down" you will find people telling you how easy it is. That's their play. But there is nothing for free in real estate. Reputable investors, agents, and coaches will all tell you to have a ton of reserves in play and will list for you all of the fees. This may not apply in your case, but for many new investors they get so focused on how to become one that they ignore the red flag signs of where extra money has to go in, but they are also told that, as you said, by countless "experts" who aren't there to help them (you), they are there to sell you a class.

See this reply in the discussion

11 Replies

Jump to latestLatest
  • Rental Property Investor · Dayton, OH · Member since 2016 · 210 posts · 160 votes
    6y

    All things to be considered. 

  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    6y

    It's pretty difficult to actually do anything in RE without money. Either your money or someone else's money is going to be involved. 

    Side note: I grew up in Orange (not East), right on Park Avenue :)

    Skyline Properties
    View Page
  • Jonathan GreeneBusiness Member
    Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
    6y

    All that means is that you are getting your advice from the wrong people. Sometimes when you are looking for things like "how to invest with no-money down" you will find people telling you how easy it is. That's their play. But there is nothing for free in real estate. Reputable investors, agents, and coaches will all tell you to have a ton of reserves in play and will list for you all of the fees. This may not apply in your case, but for many new investors they get so focused on how to become one that they ignore the red flag signs of where extra money has to go in, but they are also told that, as you said, by countless "experts" who aren't there to help them (you), they are there to sell you a class.

  • NJ · Member since 2019 · 61 posts · 19 votes
    6y

    @Jonathan Greene

    Amen. I agree 100%. My frustration was because I was "aggressively" looking for articles, interviewing other investors, etc and the # of out of pocket costs were never disclosed! I never fell into the belief that I could start with $0 of my own money, it was more disbelief that it is never talked about.

    Fortunately for me, I have reserves as well as private money lenders that I can work with. I'm also proud that I learned of these costs BEFORE my first deal.

  • NJ · Member since 2019 · 61 posts · 19 votes
    6y

    @JD Martin

    :) small world.

    I have family now in TN too.. LoL. Either way, thanks for reply. Good stuff.

  • Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    6y

    Yep,  buyer closing costs usually run about 2% including pre-paids like taxes, insurance, interest and appraisal. 

    Out of pocket costs are kinda like seasoning in the limited mentions when they talk about BRRR. Thanks for bringing it up, Dennis.

  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    6y
    Originally posted by @D Higgs:

    @JD Martin

    :) small world.

    I have family now in TN too.. LoL. Either way, thanks for reply. Good stuff.

     Yeah, small world! If you know where the elementary school is on Park Avenue, I grew up in an apartment building a couple of blocks away on the corner of Cleveland Street. This was back in the 70s so we might have some age between us :)

    Skyline Properties
    View Page
  • Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
    6y

    @Dennis A Higgs Jr You make a good point. All the out of pocket expenses you mentioned need to be budgeted for, and there should always be cash reserves available for any issues that come up such as an unexpected sewer line repair, hidden roof issue, furnace, HVAC, bad tenant, deck/driveway/appliance that needs to be addressed. Owning and maintaining property takes money, as big ticket items can happen at any time and usually happen at the worst possible time thanks to Murphy’s law. Ample cash reserves to deal with these issues and padding out the rehab budget for unpleasant surprises is key. Also this one shouldn’t be unexpected, but I’m often surprised to see new investors neglect to factor in 10-37% of gross profit for the tax man at the end (either capital gains or ordinary income depending on the situation).

  • Gita FaustBusiness Member
    Accountant · Richboro - Philadelphia, PA · Member since 2008 · 901 posts · 246 votes
    6y

    You have to account for each and every penny received, paid, and sometimes just deducted which could either be reflected on Profit Loss or Balance Sheet depending if it is a rehab or rental. We have seen settlement and loan cost not accounted for rentals and depreciated.

    It is with real estate business in mind, record it.

  • NJ · Member since 2019 · 61 posts · 19 votes
    6y

    @Harry Neal

    Interesting. Can you elaborate on turnover costs?

Join the conversationCreate a free account to reply, vote on answers and follow this thread.