Real estate investing is getting a lot of attention these days, and for good reason. Investing in real estate can yield strong returns. At the same time, owning the asset provides security, meaning that should the investment value fall, you won’t lose everything.
Nonetheless, one big problem that new real estate investors face is the fact that there are expenses involved, and they are not always straightforward. Some of these costs can lead to serious pain if you’re not expecting them.
I recently had the opportunity to chat with Ofir Eyal Bar, a real estate investment mogul that went from normal joe to millionaire. One of the big topics of discussion was the expenses that newcomer investors should consider. Here are the most pressing costs that Mr. Bar pointed out:
1. Cost Of Repairs
Often times, when making an investment in real estate, the properties that come at the best deals will need repairs. It’s not uncommon for a newcomer real estate investor to grossly underestimate the cost of these repairs.
For example, let’s say that the foundation of a building needs to be fixed, and the investor estimated that it would cost $10,000. However, when it came time to do the repairs, the actual cost came out to $35,000. The additional $25,000 cost associated with the repair could be enough to turn a profitable property into a losing property.
The bottom line is that if you’re not well versed enough to know how much a repair costs for certain, it’s a good idea to call in a pro. While a contractor may charge a couple hundred dollars to provide a quote for damages on a property that you don’t already own, that couple hundred dollars could save you tens of thousands!
2. Maintenance Costs
Once you’ve rehabilitated a property, the work isn’t over. The reality is that every piece of real estate is going to require some form of maintenance at some point in time. Small fixes, like light bulbs and drywall patches can be inexpensive. However, roof repairs, plumbing repairs, and other needs can be pretty expensive.
Ofir Eyal Bar suggests that if you’re planning on investing in real estate, you should have at least $10,000 cash in a savings account that you don’t touch. This should be enough to cover any necessary maintenance on a reasonably sized piece of real estate for a newcomer.
3. Closing Costs
In most cases, the closing costs associated with a real estate transaction will range between a few thousand dollars to tens of thousands of dollars. This is an expense that, unless otherwise negotiated, will be paid by the buyer.
There are several factors that play into closing costs. These include legal fees, lender fees, real estate agent fees and more. Ofir Eyal Bar says that a savvy real estate investor considers these costs from the beginning. In fact, he pointed to the fact that most successful real estate investors negotiate these costs down. There are two common deals that real estate investors will negotiate their way into:
- Seller Pays The Closing Costs – The buyer ultimately requires the seller to pay the closing costs as part of the deal. This could be risky in a high demand area, but for listings that have been sitting for a while, it’s worth seeing if you can avoid closing costs all together.
- Seller Shares Closing Costs – On the other side of the coin, the seller may agree to share the closing costs, alleviating the buyer of 50% of this burden.
4. Listing Costs
Finally, once your piece of real estate is rehabbed, you’re either going to want to sell or rent out the property. No matter which way you go, there are going to be listing costs involved.
Between online listing fees, signs and real estate agent costs, this can become quite expensive. So, make sure that you have a couple thousand dollars set aside for when this time comes.
When making a real estate investment, it’s important that you consider all costs associated with the investment. After all, unforeseen costs will greatly affect your bottom line.
By knowing what the costs will be before the deal closes, you’ll be better equipped to decide if the investment is likely to generate a profit or loss, leading to an educated real estate investing experience.
So, if you’re considering getting involved in the world of real estate, make sure to think about all costs associated with the deal before you sign on the dotted line.