I want to talk about the true cost associated with this line of work. When it comes to buying and selling and investing in real estate, it is different from your average asset. Take stocks for example, it can be easy to panic sell with how easy a single click of a button makes it, and I am just as guilty as anybody of falling victim to this mindset. You can’t do this with real estate. You can’t just liquidate your investments, which some might call a bug. It’s actually a feature because it forces investors to think long term. You’ve got to exercise some patience, which can pay off. If I would’ve sold when the market crashed, I wouldn’t have been in the game in the hot market that it is now.
When it comes to real estate investing for beginners and experts alike, the cost associated with buying and selling real estate is serious. A lot of people underestimate it. They think that you can buy an asset for X, sell it for Y, and in turn make a lot of money. What they don’t factor in are the people and entities that surround each deal, not to mention the time that must be invested in a property deal which can be anywhere from 6-12 months. This includes vetting brokers, preparing memorandums, reports, tax returns, property tax information, maintenance records, soliciting bids, and contracts. So again, real estate is not a liquid asset. I talk about this more in episode 3, but because of the feast and famine nature of the business, sponsors like me can go hungry for a long time, because if we’re not actively buying and selling, we’re not making a lot of money.
Now, let’s talk about those hidden costs–you gotta know where the money is coming from and where it’s going. From legal fees, title insurance, appraisal, environmental report, property condition report, mortgage tax, financing fees, transfer taxes, all of these can factor into just buying an asset that can bump the overall acquisition price by 10% or more. Selling is a whole other ball game. There may not be as many costs: broker fees, transfer taxes, legal fees create your soft cost, as a seller you need to worry about depreciation and capital gains which catch a lot of investors off guard. To put this into perspective, from a buyer purchasing a piece of property at $6.3 million and a seller taking home $4.4 million (see images below), roughly $1.9 million of value has evaporated in paying all municipalities, parties, and Uncle Sam.
Because of how complex this can be, as an owner and buyer, I must find a way to extract value, cut costs, streamline processes, and find a way to make a deal that works for me. If you want to learn more about how to get started in real estate investing, check out my courses below.
Three Key Takeaways
- Real estate is not a liquid asset. This is a feature, not a bug that forces investors to have a longer term perspective, which ultimately has greater potential when it comes to making money.
- Know the hidden costs. From buyer fees to capital gains and broker fees for sellers, there is a lot of value that can disappear to all the municipalities, parties, and government when buying and selling real estate.
- It’s a challenging line of work, and can get complicated when investing in real estate, but if you can be patient and know how to streamline the hidden costs, then you can end up doing really well.
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