Unexpected costs when buying a home as a real estate investment can put the biggest damper on a previously estimated return on investment. If you don’t know the true cost of buying a home, you could easily end up with a negative cash flow property.
Essentially, what you’ll be stuck with is an investment property that’s sucking money out of your pockets rather than earning you any kind of income!
While an experienced real estate investor would know all of the fees associated with buying a house, a beginner real estate investor could easily overlook any one of them when planning a budget for buying rental property. An important part of your real estate education is to learn all about the unexpected costs when buying a home. While some buyer’s expenses when buying a home can be avoided or reduced, others you will simply have to budget for. Here are 7 unexpected costs when buying a home as a real estate investment.
Home Inspection
If an investment property isn’t a fixer-upper, most beginner real estate investors assume a home inspection is not needed. However, a home inspection is always needed (and many times even required by mortgage lenders) when buying investment property. So it ends up being one of the major unexpected costs when buying a home. However, if a real estate investor wants to avoid some of the worst hidden costs of buying a new home like repairs and renovations, then a home inspection will be worth the cost!
A typical home inspection can cost a few hundred dollars. What real estate investors don’t expect is that more than one home inspection may be required, hiking up the hidden costs of buying a new home even more! On top of a home inspection, the investment property may require an inspection from a termite specialist. This can cost a few hundred dollars. Even a professional roof inspection might be needed (and possibly required depending on the state where the investment property is). All of these together will amount to over a thousand dollars.
Closing Costs
Closing costs when buying investment property can come as an even bigger shock to a beginner real estate investor. Why? Simply because there are so many different types of closing costs when applying for investment property financing. There are five types and each one includes different closing costs:
Title Fees/Attorney Fees
Title Search
Title Insurance
Recording Fees
Transfer/Sales Taxes
Pre-Paid and Escrow Account Fees
Prepaid Days of Interest
Prepaid Property Taxes and Interest
Initial Escrow Deposit
Mortgage Insurance
Loan Related Fees/Mortgage Lender Fees
Origination
Application
Underwriting
Credit Report
Discount Points
Investment Property Related Fees
Appraisal
Termite
Survey
Attorney
Home Inspection
So, how much is this long list of expenses going to cost you? Well, the short answer is 2-5% of the purchase price. A real estate investor trying to budget for that range on top of a down payment might not know where to start. I suggest you read our guide: How Much Are Closing Costs? In it, we break down each and every one of the closing costs and give you a much better estimate of how much each one is. Don’t let closing costs be one of the unexpected costs when buying a home!
Another thing to know about closing costs of buying investment property? They can be negotiated and reduced. Shop around for different mortgage lenders to find the lowest closing costs to fit your real estate investing budget.
Insurance
Some of the expenses to consider when buying a home may be upfront, while others can be ongoing. Insurance can be both. Depending on your investment property financing agreement, you may have to pay upfront for an escrow account as a closing cost. If this is the case, insurance payments will be deposited into this escrow account. Then, your mortgage lender will make the payments for you. If not, you will have to make the insurance payments on your own in a timely manner.
Homeowner’s insurance varies depending on where the investment property is located as well the property itself. A general estimate (according to the Insurance Information Institute) is close to $1000 a year.
Investment Property Taxes
Investment property taxes are another one of the ongoing hidden costs of owning a home. These are the kinds of expenses that can lead to a negative cash flow property if you are not aware of the kind of tax deductions investment properties qualify for.
The average costs of taxes for a real estate investor is $2000 a year. Remember, one of the benefits of real estate investing is that you can invest anywhere. Whether you buy a real estate investment close to home or out of state, check the property taxes for the location. Consider investing in real estate in states with no property taxes to drastically reduce these costs.
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Investment Property Maintenance
With a rental property, a real estate investor has to keep up with investment property maintenance. Whether these expenses come from simple wear and tear of the rental property or from actual damage, budgeting for them is really important right from the start. It is hard to pinpoint exactly how much should be set aside: some sources say 1% of the purchase price, while others go as high as 4%. The best real estate investment advice is to set aside a sizeable sum: possibly 4%. Any less, and investment property maintenance can be one of the worst unexpected costs when buying a home.
Tip: Avoid unexpected costs when buying a home by using Mashvisor’s investment property calculator. Keep track of any costs as you learn about them. See, not only what they amount to, but how they affect the return on investment.
Sign up to Mashvisor and don’t lose track of any unexpected costs when buying a home with our investment property calculator.
Unexpected Costs When Buying a Home to Use as a Rental Property
Depending on the real estate investment strategy, the unexpected costs when buying a home can vary. If you plan on fixing and flipping, for example, you won’t have to worry about dealing with bad tenants. Still, you’d have to account for the vacancy. If a real estate investor wished to use the investment property as a rental property, he/she would have to budget for both bad tenants and vacancy.
Bad Tenants
One thing that scares most people away from real estate investing is the possibility of bad tenants. Rather than being intimidated, plan for this possibility. As mentioned, your budget for investment property maintenance should be high enough that any damage from bad tenants will be covered, no matter how unexpected.
Vacancy
Vacancy rates, whether when dealing with a rental property or waiting to sell investment properties, can leave real estate investors with a negative cash flow property. This is why real estate investment analysis is crucial before buying rental property.
When choosing the best place to invest in real estate, investigate the vacancy rates of different neighborhoods before landing on a location. When choosing a particular investment property, you should plan an exit strategy and be sure the property will be in demand from real estate investors.
Avoid one of the major pitfalls of real estate investing and prepare for any unexpected costs when buying a home. Ensure they are not unexpected at all. Furthermore, use the knowledge of these unexpected costs to determine whether or not the investment property will bring a good return on investment or not!