If I want to become rich, then I need to invest in assets that generate passive income. This is what I have learned from reading the Rich Dad’s series by Robert Kiyosaki. One such asset that can generate passive income is real estate. And anyone who can afford to invest real estate will likely to do so. And they will rent their properties out in hope of earning passive income. But a lot of time, they miss out quite a number of costs in their calculation to decide whether they can afford to invest in their properties.
Let imagine that I decide to buy a property that is priced at $200,000 for investment. It does not simply mean that I will be paying $200,000. In fact, I will be paying much more than $200,000. To understand why, there is a need to know more about the type of costs involved.
There are two kinds of costs to look out for when doing any investment, namely fixed and variable costs. Fixed cost means that the cost is fixed. It will not change. Variable cost means that the cost is not fixed and it changes with time. Also, cost can also be classified into one time cost or regular cost. One time cost is something that I need to pay once only. Regular cost is something that I need to pay at regular interval such as once a month. Fixed cost is usually one time cost. Regular cost is usually variable cost.
If I buy a $200,000 property, I will need to pay legal fees to the lawyer to transact the purchase. This is an additional one time fixed cost on top of my purchase price. Another example of one time fixed cost will be the stamp duty fee.
I will also need to pay an accountant to manage and file the income tax for my rental income. This is an additional regular variable cost on top of my purchase price. Another example of regular variable cost will be maintenance fee for my property.
And there are hidden costs too! Hidden costs exist in any kind of investments or businesses. They do not just exist in real estate investment. I am simply using real estate as illustration on hidden costs. Thus, one should always on a look out for hidden costs in any kind of investments.
For example, I need to manage and maintain my own property by investing my time. Thus, time is a hidden cost. Also, I will need to find a valuator to perform a valuation on my property before the bank will loan me the money. When I apply for mortgage loan, there is a need to pay for loan acceptance fee.
As you can see, when the realtor tries to sell me a piece of real estate, he will only present the price of the real estate. He is unlikely to tell me the list of all other costs that is involved in the transaction. Also, he is unlikely to tell me that if I intend to rent the real estate out, what are the additional costs involved. In the end, I will end up spending much more than $200,000 to buy the real estate and rent it out.
Similarly, I can end up spending more money than I intended to when I buy something for personal use! An item that is cheap can be very tempting. But there is always a danger of hidden costs.
For example, I can buy a printer at a very low price. But the original ink cartridges are rather expensive. By buying a few original ink cartridges, I can almost buy a brand new printer. Thus, the hidden cost is the original ink cartridges replacement costs.
If I have noticed the hidden costs, then I am able to do something about my decision. For example, I may buy another printer instead where the cost of replacing original ink cartridge is low. Or I can look for alternatives other than using original ink cartridges. If I can find a good alternative for original ink cartridges, then I will buy that particular cheap printer.
In conclusion, I should always look for all type of costs whether I play the role as an investor or business owner as defined in cashflow quadrant by Robert Kiyosaki. Or I am simply playing the role of a consumer. After identifying all the possible costs, then I will be able to budget the amount of money really needed for the investments or whatever things. I will not be caught in a situation where I am overstretched financially because I have done a good job at budgeting my investment based on the various types of costs.