4 Hidden Costs Every Real Estate Investor Should Know

You are analyzing properties day in and day out, seeing what works and what doesn’t.

But when looking at properties, to be completely self-sufficient, there is more to factor in than just your mortgage, property taxes, property management, and insurance (typically known as your “hard costs”).

The problem is, there are other “hidden” costs that you don’t always take into consideration. But what are these hidden costs?

Let’s dive in.

1. Cost of finding a new tenant (also known as vacancy): Assuming you are not doing this yourself, you must hire someone. That someone is the property manager or a real estate agent. Each market is different but ranges by either a percentage of the lease (such as 6%) or a flat fee (such as one month’s rent). If you do it right, then this cost doesn’t happen often. However, some charge a renewal fee for tenants, so be on the lookout. This also doesn’t factor in your hard costs, which still need to get paid regardless of whether a tenant is in place. For example you have one month’s vacancy, you need to factor in your mortgage, property taxes, insurance, and general maintenance.
2. Repairs: Not everyone puts aside money for when this happens (and it will happen). Keep in mind everything has a shelf life. Hot water heaters tend to last about 10-12 years, roofs can last about 20-30 years, and so on. Unless you intend to dish these costs out of pocket, someone must pay it. One way to organize this is at the time of acquisition to do a cost segregation study. You look at the systems, determine its potential useful life, and plan accordingly. Communities with Homeowner Associations do this all the time through what are called a “Reserves Study”.
3. Utilities and maintenance: This are especially true if you come from the single-family home or condominium realm and want to venture into multifamily. Often water isn’t split, or you might be responsible for the gardening bill. If you don’t factor these in upfront, then you could be in for a rough time.
4. Property Management fees: The management fees are far more than just the monthly 6%-10% off the gross rent. Like mentioned before, there are fees for finding new tenants, fees for renewing leases, but even there can be upcharges for them to manage repairs. These costs can add up quickly.

There are other costs such as accounting, legal, and more that you can consider. However, these are the four big ones to remember when analyzing properties.