When analyzing deals an important expense that needs to be accounted for is the fixed costs. Fixed costs are all the miscellaneous fees associated with a real estate transaction and include any expenses that are incurred during the process of a real estate investment.
Real estate investors who are just starting out might not know about fixed costs at all. Furthermore, if you have ever watched a show on HGTV about flipping houses, you will notice that they rarely mention anything about fixed costs. If fixed costs aren’t calculated into your analysis it could end up buying a really bad deal. A much simpler way to define fixed costs is to break it down into three categories.
- Buying Costs
- Holding Costs
- Selling Costs
Buying Costs are all the expenses associated with the purchase of a property. There are some main buying costs that are almost always incurred. These include:
- Inspection costs – The fees charged for home inspections as well as any special inspections such as termites or mold. A typical home inspection will cost between $200-$400.
- Closing costs – Fixed costs paid by the buyer that include items like taxes, title search, attourney fees, recording fees, title insurance, ect. Typically, closing costs paid by the buyer are 2 to 5 percent of the purchase price.
- Lender Fees – The upfront costs charged by the lender make up the lender fees. Every lender charges differently, and some of the lender fees might be negotiable with your lender. Lender fees could include appraisals, underwriting, flood certificate, processing, credit check, ect. Lender fees could range from $2000-$5000 and vary greatly depending of the type of loan that is used.
Other fees may also be factored in depending on which strategies are being used and the specifics of the property. Other purchases that may be included are survey fees, marketing ad fees, bird dog fees, ect.
Holding costs are all the expenses that are charged inbetween the buying and selling phases of a real estate investment.
- Mortgage – The month to month payment that is paid to the lender. A larger rehab project on a fix and flip can take upwards of a year of mortgage payments. On buy and hold properties these will be included either until you sell the property or the mortagage is completly paid off.
- Property Taxes – Property taxes vary from state to state you can usually get a pretty good idea by looking at properties online or on the local county tax assessors website.
- Insurance – House insurance varies depending on the location. Higher risk areas on flood plains, along the coast, ect. are usually cost a lot more.
- Utilities – During a rehab you will likely have the utilities (electric, water, and gas) turned on so that the contractors can complete the project and detect any issues so that they can be fixed. In my area these are around $300/mo.
All the fixed costs associated with selling a property make up the selling costs. Selling costs include the following:
- Commissions – Real estate agent commissions are normally paid by the seller. Commission fees are around 5-6% of the purchase price.
- Closing Costs – As an investor, you might offer to pay for some or all of the buyers closing costs in order to up your chances of getting an accepted offer.
- Home Warranty and Termite Letters – Warranties, inspections, and certifications make a home buyer feel more secure about buying a property that you are selling.
All in all, fixed costs can make up a huge chunk of your analysis and are numbers that must be accounted for. If not it could cost thousands in lost profits or even cause you to lose money on a deal.