When it comes to real estate investing, there’s always more than meets the eye. What
might seem like a killer deal on the surface can end up being a total money suck when
you factor in all the hidden costs.

When you’re buying a property, it’s not a “purchase and walk away” situation. There are
TONS of things that you need to pay for that aren’t factored into the purchase price, and
if you don’t account for those, you’re going to end up losing money. That’s why it pays to
know how to crunch the numbers.

Hidden Costs in Flips and New Builds

When it comes to flipping or new builds, there’s all sorts of hidden costs that you need to
account for outside of the purchase price.

First off, if you’re flipping a house, you need to put aside money for repairs. There will be
a lot of stuff going on with the property – including significant unexpected expenses.

A lot of people also don’t think about closing costs. In Tennessee, sellers pay ~8% in
real estate closing fees. So if you’re selling a $100,000 property, that’s $8,000 right
there.

And then there’s holding costs. When you’re flipping a property, you’re not selling it right
away. Which means that while you’re holding it, you need to pay all the costs associated
with maintaining the property, like HVAC, heating, and utilities. You’ve also got to pay
property taxes AND vacant property insurance, which is pretty expensive. Not to mention
that if you are borrowing money, you’ve got to pay that as well. It all adds up.

For example, I’ve got a house right now that’s valued at $150,000. I pay $80 a month for
electric, $44 for water, $86 for taxes, and $92 for insurance. My financing costs are
another $1,750 in hard money costs.

So that’s over $2,000 a month, and that property isn’t even particularly expensive.
So if you held on to that property for six months, which isn’t long for a newbie flipper,
you’d be out about $12,000.

Hidden Costs in Rental Properties

Just like flips and new builds, there’s hidden costs associated with rental properties. One
of the biggest mistakes I see investors make is not putting away enough for
maintenance, vacancy, and management. As a general rule of thumb, it’s going to cost
you 30% of every dollar.

There’s also the issue of the “in between” stage of rental properties. Don’t underestimate
how much vacancy and management will cost you. When a tenant moves out and a
lease ends, there’s always a period between their lease ending and a new lease
beginning.

If you’re lucky, it’s just 30 days to repaint and clean the carpet. But that’s still
a month of lost income every time a lease ends, and during that month you’ve still got to
pay your note, your taxes, and all your expenses. If you’re not anticipating it, it’s going to
hurt you.

Then there’s capital expenditures, or cap ex, that you need to worry about. Those are
the big ticket items like the roof, HVAC, water heater… While it won’t happen every day, those things will need to be replaced or repaired at some point. You should be saving a
portion of the rent every month.

Think of it like your security blanket – it’s not an expense, necessarily, but you need to
save it. Because if the heat goes out in the middle of the winter, your tenants need you
to fix that immediately. And if you don’t have it set aside, you’ll need to come up with it
anyway, and it becomes a big (and expensive) headache for you.

When it comes to owning property, you need to look past the price tag and think about
all the costs associated with a deal. You want to make money on your investments, not
lose it. Understanding the hidden costs with flips, new builds, and rental properties – and
making room in your budget to cover them – will give you a leg up in making sure that
your investments are profitable.

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