Hidden Costs in Real Estate Investing

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Deals in the Making

I’m scheduled to close on a property this Thursday. Fingers crossed!

Once it goes through, I’ll share the details—what made it attractive, how I underwrote it, and the lessons along the way. Stay tuned.

In the meantime, here are a few hidden costs I’ve come across that can trip up investors if you’re not prepared.

1. Capital Expenditures (CapEx)

The “50% rule” assumes half of a property’s gross rent goes to expenses. It’s conservative, but useful.

Month to month, your costs will often be much lower—so it feels like you’re pocketing more.

But that’s the trap.

Regular expenses don’t account for capital expenditures: roofs, furnaces, water heaters, appliances. These don’t come monthly—they show up in big, ugly lumps.

That’s why the 50% rule matters. It reminds you to allocate a portion of your cash flow toward reserves. Because if you don’t, one big repair can wipe you out.

2. Working Capital’s Opportunity Cost

Real estate isn’t passive—it’s a business.

And like any business, you need working capital (liquid cash) set aside to keep things running. That covers:

• Unexpected repairs

• Vacancies

• Legal issues

Think of it as an emergency fund for your property. Without it, you’re playing with fire.

Now, no investor wants money sitting idle. But the reality is you need quick access to these funds, which limits your ability to chase yield. In other words, working capital is extra money tied up in operations—and that drag lowers your true ROI.

So when you underwrite a deal, include working capital in your invested capital. It’s the honest way to measure returns.

3. Escrow Shock: The Silent Killer

If you’re using a residential mortgage, your lender escrows taxes and insurance. But remember—they only estimate these costs.

When taxes or insurance rise, your lender will not only adjust future payments, but also add a catch-up charge for the shortfall. That can mean a sudden $200–$300 jump in your monthly mortgage bill.

If your cash flow was already thin, now you’re underwater. Gross.

This is why strong cash flow isn’t just nice to have—it’s your survival buffer.

Takeaway

Spreadsheets always look clean. But hidden costs—CapEx, working capital, and escrow shocks—separate paper profits from real profits.

Plan for them now, or they’ll find you later.

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