What costs should I be aware of when considering residential real estate investing?
Contemplating an investment in real estate? Here are a few of the most common “hidden” costs to watch out for and great reasons why every real estate investor should use the services of a qualified appraiser, inspector and real estate agent.
1 Rapid appreciating markets = rapidly increasing property taxes.
One common mistake new investors make is to look at prior year property taxes and assume their property taxes will be roughly the same. That is a big mistake that you may not realize until several months later. The new selling price of the home often results in a more recent tax assessment that can significantly increase the property taxes and eat into your profit margins. This is especially true for investment properties, which are rarely covered by homeowners exemptions or other deductions to help hold down the rate of tax increases. Working closely with a professional real estate agent can help you understand the local trends in your area and avoid these costly mistakes.
2 Small repairs and maintenance add up to big charges.
New investors routinely underestimate the amount of expenses required for renovation, general maintenance and upkeep. Always use the advice of an appraiser and inspector before buying a property. All of those seemingly insignificant items add up. For example, is that cute house outside of town on a septic system? Plan on a service fee of at least $150 for general maintenance once a year. Don’t forget the AC maintenance, smoke detectors, batteries, fire extinguishers and light bulbs, pest control, carpet cleaning, painting, re-keying and much more! You don’t even want to know how much it costs to have a tenant do real damages! If you are tired just reading it, don’t worry, the government allows you to write off the cost of hiring a real estate professional to take care of all the details for you.
3 A vacancy is another big cost that adds up fast.
Not only do you have to pay the mortgage, taxes and insurance while taking care of routine cleaning, painting, carpet cleaning and so forth between tenants but you have to actually find a new tenant. Vacancies can take a month to fill and cost money to advertise. Combine that with having to meet, screen and show the unit to prospective tenants, and your time, gas and maintenance fees can quickly become a burden. Instead, consider hiring a property manager. Not only is it a tax deduction, but it easily saves money by filling the vacancy sooner, reducing the cost of advertising and, best of all, it takes the stress of out of screening and showing the property.