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Expenses Involved with Real Estate Investment

written by: KimberLeo•edited by: Jean Scheid•updated: 6/29/2011

Real estate investments earn equity over time, but you can become overwhelmed with the many expenses that turn up with an investment. Understanding real estate investment expenses helps you to plan on how to price rents and leases.

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    Investment Costs

    Storefronts May Need Upgrades Real estate investment expenses are part of purchasing real estate. These include the down payment, inspection fees, and escrow closing costs. Fortunately you can create a reasonable budget prior to opening escrow to determine what these costs are and whether or not you can afford to make the initial purchase.

    When creating a budget of investment expenses, you want to first consider what is the most you will be able to put down against the asking price of the property. While there are some structures that accept 0% down, others may require 50% or more. Review your options with lenders and the seller to determine what is required.

    Add to the down payment what is needed for inspections. You will need a basic structural inspection but may also want to do soil testing, mineral testing, and have the property lines surveyed. You may also seek the advice of a tax advisor and legal professional to review the tax liabilities, legal documents, and your rights. Depending on the type of investment property you are buying, these may be key considerations in your decision to finalize the purchase.

    A final cost in the initial investment is the escrow closing costs. The escrow company holds the down payment and facilitates the flow of paperwork in the transaction from the inspection reports to the securing of the mortgage, and turning over the title. Escrow companies may take a flat fee or charge a percentage of the overall transaction.

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    Annual Costs

    Investment properties are designed to be income properties. But whether you have a rental house, apartment, or office building, you will have annual expenses involved with your real estate investment. These include property taxes, mortgage payments, development and maintenance fees as well as income taxes.

    Property taxes are paid semi-annually to the county tax recorder's office in the county where the property is located. Each state and county determines the rate for property taxes, often based on the fair market value of the property plus any upgrades made. Failure to pay property taxes can result in a tax lien and possibly loss of property to a county auction.

    If you have a mortgage on the property, you are paying your monthly mortgage payment plus interest. Paying the mortgage down faster will reduce the amount of interest owed over the course of the mortgage, reducing your overall cash outlay on the property.

    It is imperative to maintain the property both functionally and aesthetically to get the highest return on investment in rental and lease dollars. This includes plumbing, roof, flooring, and electrical maintenance. Painting and landscaping are also important in maintaining the value of the property. Maintenance fees are considered standard real estate investment expenses.

    Remember that the money coming in is income and will generate a taxable event. Consult a tax advisor about what expenses are deductible against the income earned on the property.

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    1. FinWeb: Tax Incentives for Investment Real Estate
    2. Escrow: How Much Does It Cost to Use Escrow
    3. IRS: Investment Expenses
    4. Credit: Financing Your First Investment Property

    Photo Credit: (Wikimedia Commons)