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When you are thinking of taking out a hard money loan to finance your next real estate investment project, don’t forget to budget beyond the hard costs. Most hard money lenders will only lend on the hard costs, so make sure you have a realistic and inclusive budget that takes the soft costs into consideration when constructing your budget.
What’s the difference between a Hard and a Soft Cost?
In order to understand what a soft cost is, you have to understand what it is not. Hard costs are easy to define and are sometimes called “brick-and-mortar costs” because it directly relates to the renovation and/or construction of the property and includes labor and materials. Soft costs are basically anything not directly related to construction costs and are everything else left besides the hard costs. When comparing bids from contractors, make sure you are also adding your soft costs into the equation of total budget on your part. For Tips on Finding Contractors for Your Fix & Flips click here and read up on the Bids section.
A few examples of soft costs are:
Any sort of plans like architectural or engineering plans, permit fees, surveys, and inspections. If you plan on borrowing money, then you also have to take those costs associated with the loan into account. This is comprised of the lender fees that include interest payments and lender closing fees.
Don’t forget to also keep in mind some of the costs that real estate investors often overlook like title company closing costs, seller-paid closing costs to the buyer, commission on the sale, marketing costs and general maintenance costs, like utilities, gardening costs, etc.
The real estate investor must account for all of the soft costs of the project or it will eat into the returns when unaccounted for.