A potential killer of your real estate investing strategy is a type of churning scenario where you throw energy into deals but don't get the necessary amount of capital gains back out of the process.
In equities, “churning” happens when individual trades have too much cost attached to them, often in the form of commissions: real estate churning is like that, because the associated costs of transaction eat up too much of the related gains.
As a new real estate investor, you have to be aware that the long laundry list of costs associated with a deal will quickly eat up a lot of your discretionary budget. These include:
- Closing costs
- Lending costs
- Rehab costs
- Title and attorney costs
- Costs of acquiring permits for improvements
This is by no means an exhaustive list. You're going to have these costs pop up, and some of them create time management problems on their own.
For instance, unless you have an excellent contractor Rolodex, certain kinds of obscure problems like sewer line issues and leaky appliances can result in a lot of time spent just trying to mitigate risk – not to improve the property, but to “fix” the property!
So you're trying to mitigate risk and improve the property at the same time. Then you might have unanticipated transaction costs. It's easy to wind up with a lot less money than you had hoped for.
Being a Landlord of an Empty House
Another major struggle in real estate investing is related to simply being that name on a deed.
Any time you are acquiring property, you're taking part in a major responsibility.
Some people flip properties to rent them out – in which case, they are going to be actual landlords.
But even if you don't have a tenant, if you have bought the property, you own it—and it's your responsibility to keep it safe, secure, and livable, and to keep it functioning as a part of a structured neighborhood.
Even if it's only a few weeds growing beyond the municipal ordinance length, you're likely to hear about it from local code enforcers.
Other related costs are also similarly obscure and in some cases, a very unpleasant surprise.
Have you checked out the cost of vacant home insurance?
For many first-timers, the combined cost in terms of time, money, and stress seems simply overwhelming.
But you can learn to master smooth real estate investing plans – just like the industry veterans.