In real estate investment, we all want to see our profit margins grow. Most of us try to do that by improving our properties, raising rental fees, and scaling our portfolios over time.
However, we often overlook the biggest cost of all...our time!
How often are you spending your valuable time on things that you wish were just done for you?
For real estate investors, there are costs to deal with at every stage of the process: whether you’re in the middle of acquiring a property, searching for a residents, dealing with property renovations, or just going about your day-to-day.
Most of us are familiar with the basics of where real estate investment is going to cost us. But are you familiar with the hidden, sneakier ways costs can creep in and eat into your profits?
4 Hidden Costs Killing Your Real Estate Investment Profits
Working with the Wrong People
Whenever you trust another person to do a job for compensation, you are automatically taking a risk. You’re trusting them to do a job for money. And they might not deliver on their end of the bargain. You might hire a contractor who doesn’t do their job very well—leading you to have to turn around and hire someone to fix a shoddy job.
The same can be said for the other people you encounter and work with along your real estate investment journey. Real estate agents, property managers, maintenance works, accountants, and lawyers: all of them need to be trusted by you to do their job and deliver good, consistent quality work. Otherwise, you may end up paying for their negligence, errors, or deception.
When Stuff Just Breaks
Maintenance is such a necessary part of investing in real estate. We know that, and expect maintenance to factor into our costs. But what about when stuff just breaks? It’s unexpected and unpredictable. You can do all the maintenance in the world and stuff can and will just break. Or people will break things, often by accident. Broken appliances, pipes, HVAC. Even things like windows that can be accidentally broken by a residents or a careless worker.
And you have to pay to have it fixed. It’s frustrating. It’s annoying. But it will definitely happen and the best you can do is anticipate it and set aside money to handle it.
Things can be broken during renovations, increasing your costs. The best you can do is anticipate that things may go wrong—and you’ll be fine!
Insurance and Tax Costs
This is perhaps more obvious and less hidden, but there are special considerations when you are a real estate investor. If you invest out-of-state, you’re going to be dealing with different taxes than you would in your own home state, depending on the laws where you invest. States are often harder on investment properties, so it would be wise to consult a tax professional who is experienced in dealing with real estate investors to ensure that you can get the most out of your tax breaks when you file.
As far as insurance goes, you’re also going to be paying more. Rental property insurance (your status as an investor versus the primary occupant) will leave you paying around 25% more in your policy.
That’s not even accounting for additional overages that you might want. So it’s something to factor in when you’re running the numbers on an investment property and seeing whether or not it will be profitable. It’s vital that you’re running accurate numbers.
Bad (and Less-than-Good) Residents
Here’s the thing about residents. They’re a good thing. residents are your source of income. They’re more than customers, they should be long-term partners. You and your managers should be working to make them comfortable and happy. If you have a good residents, it can be smooth sailing for everyone. Few issues to worry about, no conflicts, paid on time…
But a bad residents? They can be trouble. And bad residents come in a lot of different flavors. A few behaviors that you might see in a bad residents:
- Never pays rent on time.
- Doesn’t keep the property clean.
- Breaks things through negligence.
- Engages in illegal activities.
They can be a money sink for you. Bad residents, even if they don’t actively cost you money, they will cost you money. Because even if all they do is neglect your property, it means at the end of their lease you’re going to have to shell out more money to make up for their neglect.
Bad residents cost you. That’s why it’s so important to properly screen your residents (which goes all the way back to having property management that you can trust. It’s all connected!).
One of the primary ways you can reduce your costs in real estate investment is to join forces with trustworthy people. They can help mitigate your risk along the way to ensure that you’re working with the right contractors, the right managers, and maintenance, and finding the best residents. They’ll help ensure that you’re getting maximized cash flow and avoiding hidden costs as much as possible.
Who are those partners?