Know The Hidden Costs While Investing In Real Estate
Real estate investing is a big and important decision in one's life. While going ahead with this utmost decision, you get excited and choose everything right, whether it be a location, setting up the budget, or preparing for the housewarming.
But, before you could seal the deal, you get greeted by a bunch of hidden costs. These hidden costs are not hidden per-se, but they are entirely forgettable in the excitement of your dream home.
Did you know that these hidden costs that you end up in ignoring may pinch your pocket? However, it is never too late. Yes! For sealing the deal, you need to ensure that the benefits of a property outweigh the costs. Hence, you need to drill down and consider reading the hidden fees for making a big difference in your investments.
What Do Hidden Costs Mean?
As the name suggests, real estate's hidden cost means the expenses generally not included while purchasing property or any other investment in real estate. Such expenses are associated with the property and are unavoidable, like advance maintenance deposit, parking charges, etc.
Why Is It Important To Know Hidden Costs in Real Estate?
Identifying only the visible costs while owning a real estate property might not show an accurate income statement for a particular project. So, while investing in real estate, knowing the hidden costs or joint costs are also important. These are the costs that can adversely change the investors' value resulting from the investment decision.
Hence, identifying the hidden cost is essential to consider, but often it isn't easy to locate. The article will further describe some of the expected hidden costs found in real estate and suggest tips to mitigate the hidden costs.
Types of Hidden Costs in Real Estate
Space for parking is often a handy amenity in owning an apartment. Still, this is not an amenity that is offered with an outright. You need to pay an additional cost to the real estate builders to claim your parking space.
These charges might vary depending on the spaces you own in the real estate. And is directly proportional to the value of the area you've agreed to live in.
Advance Maintenance Deposit
When you invest in real estate, you are charged by the builder's maintenance deposit in advance while owning an apartment in a new society.
Usually, the charges on the existing projects are made by the current Resident Welfare Association or RWA. The amount paid covers the amenities offered with the property like clubhouse, gardens, parks, and daily amenities like garbage collection, street cleaning, etc.
Preferential Location Charges
Undoubtedly, it's quite attractive to own a house facing a park or a pool. Even living at the top floor within a high-rise building is quite thrilling.
But, the property owner must be aware that all these attributes come with some extra cost.
Specifically, the word preferential location charges or PLC include an amount paid to the builders against the property having a better layout or location.
Since PLC is a subjective parameter, the charges levied upon vary from project to project, floor to floor, and increased the attributes will also increase the PLC value.
High Vacancy Rates
Often investors of the real estate ignore a high hidden cost while owning a rental property like vacancy rate. This ignorance can lead to high risk and might reduce your rental income to zero.
In this way, you might be running your rental expenses like payment of monthly mortgage and other costs out of your pocket.
So, without having a proper backup plan, you might be losing money instead of making money. Therefore, it is advisable to offset the negative repercussions of negative cash flow by having an emergency fund for survival in the long run.
Cost of Relocation
Generally, when an individual owns a new apartment and shifts from the old house to a new society, you often get troubled for moving all your home decor like furniture and other assets.
However, nowadays, it is much easier to shift all your assets with relocation services. Still, these services are not cheap. You need to pay a handful of amounts to avail of the relocation service.
So, it is advisable to include such costs before setting out a budget to buy a home and decide to shift.
If you see buying a property in real estate through a broker or agent requires some commission. These charges mostly vary depending upon the property and the fees of the agent.
Though you need to pay a handy amount to the appointed agent and it is an unavoidable expense still, you need to plan rightly and set your budget covering such costs.
As seen, such expenses are unavoidable, yet, you have a way out by assigning to the online real estate agents, as they charge less amount compared to other agents. Even they provide additional services too.
Mostly, the investors' properties are charged with Goods and Service Tax, just like stamp duty and registration fees. The under-construction parcels in India are charged 5% per year, while the affordable housing projects are only charged 1%. And the properties that are ready to move or those projects that have got the completion certificate by the government are charged no GST.
GST is the new concept in India, and knowing the rates can help estimate the cost of the property. Though such expenses are unavoidable, still, it can help you to invest in the right property.
Tenant and Buyer Costs
Whether you look for renting out a property or deciding to flip the houses, you will need some amount of money to find the right tenant or homebuyer. Right from the advertising to paperwork, these expenses can quickly add your cost to the investment made.
Even you will find that the rental owners to charge application fees for searching the tenants for you. Moreover, if you plan to use a property management team like the real estate agent or the builder to help you find the right tenants, they will charge an additional cost to compact their costs of work.
Tips for Mitigation of Hidden Costs
Conducting Home Inspection
Before buying a rental property or space, you need to run out a home inspection to know your property's actual state or value. Doing this will help you avoid any unexpected costs relating to owning a rental property.
For mitigating the risk of high vacancy rates on the rental property, you need to ensure a long-term relationship with the tenants. So, focus on quality tenants and do whatever is possible to keep them in the long way.
Use Investment Property Calculators
This tool will calculate the investment property's profitability rate using the metrics like cap rate, cash on cash return, etc. It will further help compare the similar investment properties to identify which one suits best for your real estate portfolio.
Underestimate the Income and Overestimate the Expenses
Mostly the investors look and work for long-term financial success using conservative estimates for the rental income and liberal estimates for the spending the amount. For this, you need to live with a predictable paycheck and prepare yourself for the worst scenarios by having an emergency fund and stashing out extra cash.
Take Advantage of the Tax Breaks
For a lively cash flow deposit of filing annual return yearly, you need to take advantage of taxation and claim every year deductions, depreciation, and earn long-term capital gains on the property.
As cliche as it is, you surely need to spend money to make money. But, it doesn't mean you need to always pay more and more in real estate investing.
Knowing the right tips can increase profits in the long run and reduce the costs and stress in owning a property.
You can find a way to reduce the costs by offsetting other expenses at times. So, it's good to consider all the costs while investing. Either it is visible or hidden costs of minimizing the risks and earning high rewards.
The hidden cost in real estate means the expenses generally not included during a purchase of property or any other investment in real estate.
When you invest in real estate, you are charged by the builders' maintenance deposit in advance while owning an apartment in a new society.
Usually, the charges on the existing projects are made by the current Resident Welfare Association or RWA. The amount paid covers the amenities offered with the property like clubhouse, gardens, parks along with daily amenities like garbage collection, street cleaning.
For a lively cash flow deposit of filing annual return yearly, you need to take advantage of taxation and claim every year deductions, depreciation and earn long-term capital gains on the property.