Finance

Property Costs Every New Investor Should Be Familiar With

Are you old enough to remember the 1990s house flipping boom? If so, you probably remember all of those late-night infomercials explaining how anybody could become a real estate investing millionaire with no money down. Nearly 30 years later, most of us know that there is more to it than those old infomercials claimed. For example, consider property costs.

The purchase price of a potential property is not the only consideration. It isn’t the only cost borne by investors as they acquire new properties. Moreover, a new investor unprepared for all the costs he will experience could get himself in financial trouble on those first few deals.

Are you new to property investing? If so, here are some of the costs you need to pay attention to:

1. Your Down Payment

People buying residential properties as their primary residences can often get away with down payments of 10-20%. Such a low down payment is rarely acceptable in property investing. Banks tend to require 25% or more. Hard money lenders can require as much as 50%.

Salt Lake City’s Actium Partners, a hard money specialist that loans to property investors, explains it this way: your down payment represents you putting skin into the game. Lenders want to see as much skin as possible on real estate investments.

2. Lender Fees and Costs

Regardless of how an investor finances a new property, there will be lending fees and other costs involved. Typical lending fees include loan origination fees, service fees, appraisal fees, and more. Both banks and hard money lenders also offer points (at an additional cost) in order to lower interest rates.

Above and beyond lender fees are the normal costs associated with buying real estate. Investors will pay for their own appraisals. They need to cover attorney’s fees, broker fees, and more. It all adds up to a much higher bill at closing.

3. Renovation and Maintenance Costs

Rare is the deal in which an investor acquires a property and either sells or rents it without having to do any renovations. Renovations are just a normal part of the business. But they also cost money. The worse the condition a property is in, the higher the renovation price tag.

Investors planning to hold a property to generate rental income for several years also need to consider maintenance costs. In the initial stages, a property might not generate enough rental income to cover all the maintenance. At least for a while, the investor might have to make up the difference out of pocket.

Some investors who build large portfolios of rental properties turn maintenance over to a property management company. Doing so offers the benefit of not having to worry about maintenance or day-to-day operations. But there are costs and fees associated with property management services as well.

4. Tax-Related Costs

Last but not least are tax-related costs. Property investments are not subject to income tax in most cases. Instead, investors pay capital gains taxes. It is a different matter for local taxes. For example, investors holding vacation properties in Florida are required to pay bed taxes on all weekly rentals. Those taxes need to be accounted for so that they do not eat into an investor’s returns.

Would it be that making millions in real estate were as easy as those 1990s infomercials made it out to be. The reality of real estate investing is a lot harder. There is good money to be made, but money can also be lost. New investors need to be aware of all the costs that come with it.

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