Why are people obsessed with making money? It’s easy, right? All anyone has to do is buy a piece of property, flip it, and count the cash. Do it three or four times and, as long as everything goes smoothly, you’ll never have to work again.
As naïve as it sounds, lots of people assume this scenario to be the case when they invest in real estate. Forget that the market can be volatile, or that there is a complete lack of knowledge because property investment seems easy. After all, most of us own a home and did it without any huge setbacks. Investing is the same in their mind.
Hopefully, your mindset won’t be as casual and you’ll understand the perils. Investing money in anything is risky and everyone should be aware of this before pumping cash into a new venture. But, there are hidden secrets that don’t rear their head until it’s too late, hence the terms “hidden” and “secret.” These can turn a sound investment into something scary, so it’s imperative to understand them beforehand. Thankfully, this post has a list of reasons why real estate gurus and amateurs alike lose money.
Take a look at the following.
The likelihood of buying a property that is ready to move into straight away is slim to zero. Real estate is expensive, more so than ever before, and the houses at the top end are fully furnished and livable from the get-go. The odds are high your investment will be a house with potential that needs unlocking. In short, that’s a euphemism to say it will require work and lots of it! Smart people understand home improvements are necessary, essential even as no one will rent or buy a dump. Anyway, the state of the house will make it obvious if there are cosmetic issues such as ripped up floorboards. Still, investors want to save money to improve their bottom line which presents problems. For example, you may be blind to the truth and gloss over it in a feeble bid to sweep it under the carpet. Then, the home needs rewiring and there isn’t enough left in the budget to cover the costs. There is no way not to renovate, which is why budget construction is imperative. Always overprice things and then add an extra 5% if necessary.
Is there anything wrong with the furnishings? Of course not! There’s a sofa and a TV so what more could anyone want?! Well, the answer is quite a lot. When tenants look to rent, they expect the landlord to provide all kinds of amenities. And, at the top of their list is stylish, comfortable furniture that doesn’t appear as if it is 50 years old. Seriously, the furnishings in the property will make a massive difference to the resale value, whether renting or selling. Remember that when attempting to negotiate a deal, perception is everything. So, buyers aren’t going to be receptive if they can’t imagine living there themselves. Furniture makes a house homely and adds to the experience. Like adding home improvements, there is no way to avoid paying for furniture without harming the investment. So, the key becomes cutting costs. Used or second-hand pieces aren’t out of the question as long as they appear new and clean. Of course, a tin of paint adds life and vibrancy and is cheap.
Selling is a short-term option that can work depending on the circumstances. However, lots of investors want to keep hold of the property, rent it out and pay off the mortgage in the process. That way, it covers the costs itself and builds up a nice nest egg in the process. As easy as it sounds, there are extra costs to keep in mind such as maintenance. When you’re a landlord, you have a duty of care to the tenants to take care of any problems because, well, it’s your house. Plus, it’s in the contract. Savvy investors may try and change the wording so they aren’t liable, but renters won’t bother taking the gamble. Unless there is a significant price drop, which is counterproductive, then there is no point with many properties on the market. The trick is to include the amount in your financial research beforehand to ensure it’s affordable. 1% to 2% of the property value is the industry standard. Other than that, be proactive and spend money now to slash expenses in the future. A new boiler, for instance, is costly but an old one can break down which adds to the rates. The same goes for plumbing and electricity.
The saying goes there are two things in life which are certain: death and taxes. Even still, investors forget to factor in the latter when they purchase a house. Usually, people see the value and assume that is the total amount when there are extra costs. Forget about maintenance and home improvements for a moment because they are small fry. Taxes can add on thousands now and thousands more in the future when you finally sell, so they are worth taking seriously. The taxman wants his cut and you’ll have to give it to him if you don’t want a big fine or a potential jail sentence. Governments are sincerely strict regarding tax evasion. After all, they don’t want to lose money. Firstly, please be aware of the types of add-ons that you are expected to pay. Stamp duty is a big one because there are two main types. Property Guru has a working summary if you want to see it in action. Next, research legal loopholes. Capital Gains tax has some flexibility if you can sell the property for a property as only half of the amount is taxed. Otherwise, there are Business Entertainment Expense and Employee Stock Options.
No one sees wasting time as wasting money, too. Sure, it’s important because everyone wants a healthy balance in their life. But, it’s not essential because it’s infinite. Anyway, time isn’t concrete so it’s hard to tell when it costs you money. As true as the last statement is, there are times when wasting the seconds results in dropping into the red. Consider investing in a property and then having to respond to a “crisis.” Maybe there’s a flood and you have to renovate, or perhaps you have to sign a contract because there are new tenants. Either way, the odds are high that the landlord is going to have to take time off work to find a solution. Employers are not as strict in 2018, but they won’t accept leaving early for outside investment. Vacation days are a perfect compromise, but what if you don’t have any left? The only option is to take the leave as unpaid and forfeit a part of your wage. When you factor this into the expenses versus the profit, it can hurt your bottom line. Try and organize things so that it takes place before or after work or on the weekend.
Investors shouldn’t and don’t let geography get in the way of a sound investment. Because you’re not in the state doesn’t mean you can’t take care of issues smoothly. Granted, it’s harder to do over the phone, but it’s still possible. Of course, you’ll need a primary property manager in the local area to act as a liaison. Hopefully, there is a family member or a friend you trust implicitly who doesn’t mind taking up the slack. If not, then you’re going to have to hire one and that is where the problems begin. Being out of the state makes it difficult to research the legitimate companies and the cowboys. Should they not keep the tenant happy then it’s a massive waste of money. Thankfully, the internet helps to bridge the gap but remember that you still need to stay in touch. Contact the tenant as well as the property manager to get an evaluation of their happiness. Is the company doing everything you’re paying for, or are they cutting corners? If it’s the latter, you’re better off taking responsibility while searching for a new manager with an excellent track record.
Probably the biggest expense that investors don’t factor into the purchase is the initial price. As silly as it sounds, people are too excited to try and haggle. Or, they believe the myth that sellers have the power because they can walk away at a moment’s notice. Apparently, their desire to sell isn’t as strong as yours is to buy. Don’t believe this nonsense because they want to get rid of the property as badly as you want to become a homeowner. Anyway, dream homes aren’t born – they are made. There may be a property which you love but there will be another one down the road somewhere. With that in mind, never be scared to play hardball over the value. Come in low and gradually work your way up if they reject the first offer. Also, don’t let the realtor influence your decision. Buyers may be lining up but it could be a tactic to start a bidding war too.
With this advice, you should be able to avoid the major hidden costs and save a fortune.