Real estate investing has been around for a long time. However, in the past, it was thought to be a business venture that only those with truckloads of money and a strong network could benefit from. Thanks in part to home improvement shows, however, everyday people have come to realize that purchasing properties to renovate and resale (or lease) can be a great way to supplement income.
If you happen to be one of those individuals interested in investing in real estate, there are still costs associated with real estate investing that must be considered. All too often, people jump at the opportunity to invest in a commercial or residential property without factoring their out-of-pocket expenses. They end up digging themselves into a hole financially and lower or eliminate their return on investment.
Like any other investment, there are risks involved in real estate that can have a negative impact on your bottom line. To avoid those pitfalls, it is imperative to have a clear understanding of how much you’ll need. Below, is a brief description of the associated costs of flipping real estate:
Purchasing the Property
One of the first financial considerations when investing in real estate is the actual cost of the property. Investors will need to have the cost of the property upfront to purchase the home. If not, they’ll need to look for mortgages and be in a financial position to qualify (i.e. good credit, down payment, closing costs, etc.). Even after securing a mortgage, real estate investors will be responsible for keeping up with the monthly mortgage payments until they’ve sold the property.
The best properties to invest in are those that need a little TLC. This is because they will often be placed on the market at a lower rate than properties that are ready to sell. In order to get a return on your investment, you’ll need to hire contractors to complete construction and renovations on the property to make it ideal for your target buyers.
Fortunately, you can obtain a construction loan with hard money lenders. Hard money rates for a construction loan are at 8.99% and you can qualify for as much as 65% of the finished value of the property making it very attractive for real estate investors.
Investors can also save in this area by completing some of the work themselves or shopping around for affordable construction companies and contractors to complete the job.
It is the responsibility of the real estate investor to cover the cost of property insurance until the property has been sold. Carrying insurance is necessary to provide financial protection for the investment. In the event that something should go wrong during construction or some other unforeseen event (i.e. natural disaster, fire, robbery, etc.), the property insurance will provide financial coverage saving you thousands of dollars in the process.
The cost of property insurance will vary depending on where you’ve purchased a property and the size of the property you’re trying to insure. You can shop around for affordable rates or look into obtaining a mortgage that also includes insurance payments.
Property taxes must be maintained on a real estate investment. Depending on where the property is, this could cost you several thousand dollars each quarter.
Though you don’t live in your investment property, chances are you’ll still need utility services turned on. Construction workers and contractors will need adequate electricity and running water to perform their jobs efficiently.
Once the property has been renovated to your liking, the next step will be putting the property on the market. As the idea is to sell or lease the property sooner rather than later, you’ll need to invest in marketing. From posting to real estate databases and placing ads in local classifieds to staging and open houses, these marketing and advertising costs can add up pretty quickly.
Selling or Leasing the Property
Unless you plan on doing all the legwork yourself to sell or lease your real estate property, you’ll also need to set money aside to have a real estate expert do it for you. This means paying commission to a real estate agent which is approximately 5-6% of the property sale’s price.
Yes, it’s true that an average-salaried individual can invest in real estate and flip it for a huge return. Keep in mind, however, that in order to get a big return, you first have to make an investment. From the time you purchase a property until you sell it or find a suitable tenant, the above-mentioned expenses are your responsibility. To make the investment worth it, it is imperative that you’ve assessed your finances, identified the best service providers for assistance, and developed a sound financial plan to both minimize and manage these expenses.