Carrying Costs on Real Estate Investments

Buying a home or investing in real estate can be very profitable. But, what’s the cost of carrying that investment over time? Learn how to calculate your carrying costs and make smart financial decisions with this blog post.

The fees that an investor must spend on an investment property for the period that he or she owns it are known as real estate carrying costs. Utilities, mortgage payments, taxes, property insurance, and other monthly carrying expenses are among the most frequent. Both fix-and-flip and buy-and-hold investors are subject to these carrying expenses.

What Are the Costs of Carrying a Real Estate Investment?

Carrying costs in real estate are the ongoing expenses that the property owner is liable for during the life of the property. Real estate holding expenses are normally paid monthly and are significant since they impact the investor’s bottom line because they are included in the monthly budget as well as a consideration when determining a property purchase budget.

Many investors fail to include all of their carrying expenses when purchasing an investment property and just include the acquisition and renovation expenditures. Other real estate carrying expenses, such as utilities and management fees, are vital to include since they affect everything from your budget to your return on investment (ROI), cash flow, and cap rate. They may also assist you in determining how much rent you should charge if you own a rental property.

Carrying costs are the ongoing, generally monthly, expenses that come with owning a home. Carrying costs, unlike operational expenditures, include Your home loan payments. Consider them a part of the price of doing business. These expenses are incurred when you own the investment property.

The following are some typical real estate carrying costs:

• Your home loan payments
• Insurance
• Taxes on real estate
• Maintenance
• Dues to home owners’ association (HOA)

However, if marketing expenditures are incurred on a regular basis, some investors regard them to be holding costs. Two categories of investors, fix-and-flippers and buy-and-hold investors, have differing carrying costs.

The following are the two categories of real estate carrying costs:

1. Carrying Costs of Real Estate for Fix and Flippers

A fix-and-flip investor buys a house with the goal of renovating it and reselling it for a profit. The expenditures of retaining a property before selling it are known as real estate holding costs. The repair and flipper’s budget includes these carrying charges. They need to know how much the carrying expenses will be in order to calculate the cost of flipping a property.

Carrying expenses for fix-and-flip properties often include:

• Taxes on real estate: This is the tax levied on a piece of real estate by the governing municipality and varies based on location, property value and size. You can find the Taxes on real estate from your local property tax office, Zillow or your real estate agent.
• Vacant or unoccupied property insurance is often needed by your lender while you’re renovating the property. A typical year’s worth of unoccupied property insurance costs $1,842 or more, with most carriers prorating the amount if you sell the property within the year.
• A repair and flipper would often employ a hard money loan, which is a short-term interest-only loan used to finance the purchase and rehabilitation of a home.
• Utilities: The number one carrying expense many repair and flippers overlook in their budget is utilities. Contractors need power and water to operate, as well as heating and cooling, depending on the season. Don’t forget to include in the cost of garbage pickup on a monthly basis. The cost of utilities varies based on the kind of service, the size of the property, and the age of the property. New properties are often more energy-efficient, resulting in decreased utility expenses.
• If your fix-and-flip project is part of a HOA, you’ll be liable for the costs from the moment you buy the house until you sell it. These costs vary based on the property’s location, size, and offered amenities.
• Some investors consider marketing payments to be a component of your carrying costs, while others do not. These fees would cover the expenses of marketing the home for sale, conducting open houses, and printing materials like as fliers and bandit signs.

Rehab costs, acquisition costs, and real estate agent fees are not often considered carrying costs since they are one-time expenses that do not accrue over time.

2. Carrying Costs of Real Estate for Buy-and-Hold Investors

Buy-and-hold investors buy an investment property with the purpose of keeping it and renting it out for five years or more. This differs from fix-and-flip investors, who buy a property and seek to sell it as soon as possible. Buy-and-hold investors, in particular, tend to have greater utility expenses and lower insurance prices.

Because they’re selling the property, buy-and-hold real estate investors have continual upkeep and repairs that fix-and-flippers don’t have. Property management costs are another expenditure that some investors factor in.

Carrying expenses for buy-and-hold investment properties include:

• Taxes on real estate: This is the tax levied on a piece of real estate by the governing municipality and varies based on location, property value and size. You can find the Taxes on real estate from your local property tax office, Zillow or your real estate agent.
• Rental property insurance is distinct from homeowners’ insurance in that it often covers loss of income, risk coverage, and liability coverage. A typical annual insurance costs between $1,473 and $1,596.
• An investment property loan usually comprises interest and principal, with interest rates starting at 4.5 percent. The monthly payment is calculated using the purchase price and the rate.
• Utilities: Typically, a buy-and-hold investor will pay any common area utilities and, in certain cases, the water bill, as specified in the lease. Electricity in an apartment building’s corridors or water for an outside sprinkler system are examples of common area utilities.
• Maintenance: This refers to the ongoing expenses of maintaining the property, such as gutter cleaning, snow removal, painting, and lock changes, which are normally done on a monthly basis. This does not include the cost of repairs or rehab.
• HOA Costs: If your rental property is part of a HOA, you’ll be responsible for paying the fees from the moment you buy it until you sell it. These costs vary based on the property’s location, size, and offered amenities. It’s possible that you’ll have renters pay the HOA costs, although this isn’t common.
• Property management costs are the monthly fees you pay a property manager or property management business to manage your property, collect rentals, and lease units. These expenses typically range from 8% to 12% of the overall rentals received.
• Airbnb fees, advertising expenditures, and other recurrent marketing expenses are all common marketing fees for short-term rentals and vacation rental homes.

Real Estate Carrying Costs Examples

Let’s look at how carrying expenses affect your ROI on a fix-and-flip project versus a buy-and-hold home. For both scenarios, let’s suppose the purchase price is $200,000.

On a fix-and-flip job, let’s assume the following costs:

Costs of Acquisition $20,000 as a down payment Expenses for closing: $10,000 The loan amount is $180,000. $210,000 in total acquisition costs

Monthly Carrying Costs Mortgage payment: $1,200 Taxes on real estate: $200 Property Insurance: $150 Utilities: $100 HOA fees: $100 Marketing fees: $100 Total Monthly Carrying Costs: $1,850

Let’s pretend that it takes you three months to repair and sell the property, that your rehab and selling expenditures total $30,000, and that you get $300,000 for it.

Your total investment is the sum of your carrying expenses multiplied by three, as well as your purchase costs, rehab, and sales charges.

$1,850 multiplied by three is $5,500 $5,500 plus $210,000 plus $30,000 is $245,500, your total investment.

To calculate your return on investment, divide your profit by the entire amount invested and multiply by 100 to obtain a percentage.

The difference between the sales price and the entire investment is your profit. Profit $54,500/$245,500 = 0.22 x 100 = 22.2 percent ROI $300,000 – $245,500 = $54,500 profit

This chart depicts the profit from a single transaction, which is how most fix and flippers measure ROI on a per-property basis.

You can see from this example what your total monthly carrying expenses are and how they factor into both your home purchase budget and your monthly budget. They also have an impact on your return on investment. All other factors being equal, the shorter your timescale, the smaller your carrying expenses, and the better your ROI.

Let’s look at how carrying expenses affect your return on investment (ROI) for a buy-and-hold rental property. Assume that your entire monthly rental revenue is $2,000 and that you have the following expenses:

Costs of Acquisition $20,000 as a down payment Expenses for closing: $10,000 The loan amount is $180,000. $210,000 in total acquisition costs

Monthly Carrying Costs Mortgage payment: $965 Taxes on real estate: $200 Property Insurance: $125 Utilities: $120 HOA fees: $100 Maintenance: $100 Property management fees: $160 Total Monthly Carrying Costs: $1,770

Because we’re computing yearly ROI, double your carrying expenses by 12 and add the cash part of your purchase costs. If you include in your mortgage, your first-year ROI will be negative.

$1,770 multiplied by 12 equals $21,240. $51,240 = $21,240 + $30,00 Your overall financial commitment

Your cash flow is the difference between your monthly rental revenue and your carrying expenses. $230 = $2,000 – $1,770 your recurring monthly cash flow

Because there are 12 months in a year, your yearly return is equal to your monthly cash flow multiplied by 12.

$230 multiplied by 12 is $2,760 each year Annual Return on Investment (ROI) = Annual Return on Cash Invested 0.0538 x 100 = 5.38 percent ROI = $2,760 / $51,240

As you can see from the example above, real estate carrying expenses play a big part in your budget and have an impact on your return on investment. To correctly calculate your rental pricing, you need to know roughly what your real estate carrying expenses will be.

Managing Real Estate Carrying Costs: Some Pointers

Real estate investors must control their carrying expenses since they are a component of their budget and, if not managed effectively, will lead them to go over budget. This implies that their return on investment (ROI) will be lower, as will their cash flow. For example, if you fail to budget for monthly utility expenditures, you may find yourself in a cash flow deficit or having to scramble to pay your energy bills at the end of the month.

However, if you know your carrying costs upfront, you can account for them, plan accordingly and stay on budget. We talked to a few real estate professionals, and they gave us some helpful Managing Real Estate Carrying Costs: Some Pointers.

The following are some suggestions for reducing real estate carrying costs:

Get a Clear Picture of Your Real Estate Holding Costs Up Front

Investors should be aware of their real estate carrying costs upfront so that they can determine if they can afford the property, what their budget should be, and how much rent they should charge.

“As an investor, it’s critical to understand your carrying expenses so you know exactly how much money you’ll have to put into the property.” The idea is for the rentals to cover the carrying expenses as well as generate extra money for your investment. Make a number crunch and then a number crunch again. Prior to making a purchase, be sure the property is properly investigated. An investor’s worst nightmare is to close on a home only to have significant mechanicals fail. That’s when unanticipated carrying costs quadruple and triple!”

— Lindsay Stevens, Stevens Realty Group Associate Broker

Include the cost of renovations in your carrying costs for real estate.

Renovations may have a significant influence on the expenses of real estate ownership. When renovations take longer than expected, investors sometimes ignore extra finance and utility expenditures.

“A renovation project that continues beyond the projected time period may have significant financial consequences, such as greater interest expenses and holding costs, lowering total profit.” Investing expenses are often underestimated by investors. To create a realistic budget, investors must account for general upkeep, utilities, and interest payments.”

— Larry Friedman, Principal & Co-founder, SDF Capital

Real Estate Carrying Costs are Affected by Rehab Supplies

Theft is often greater when a property is unoccupied than when it is inhabited. Theft incidents might raise your carrying expenses and reduce your return on investment.

“When flipping a property, the danger of theft and damage is often greater than with other unoccupied homes.” Even your contractors have the ability to haul away materials that might have been returned for credit. To save your carrying expenses, establish a supply inventory and make sure your stuff is appropriately secured.”

— Bruce Ailion, Real Estate Agent & Attorney, RE/MAX Town and Country

Frequently Asked Questions (FAQs)

What Is the Best Way to Calculate My Real Estate Carrying Costs?

Carrying costs are made up of several components including utilities, taxes on real estate, landlord Insurance, mortgage payments and so on., so your total carrying costs will vary depending on the amount of these specific costs. You can call your utility company to get average costs, and you can ask the previous owner for former utility bills. You can find out your Taxes on real estate prior to purchasing the property by looking at Zillow or contacting your local property tax office.

How Long Do You Have to Pay Carrying Costs on Real Estate?

You are responsible for paying real estate holding expenses for as long as you own the property. Keep in mind that your purchase expenditures, such as the down payment and closing charges, are not included in these carrying costs. They do, however, cover the expenses of owning and maintaining the property. Until you sell the property, you are responsible for these expenditures.

Are taxes included in the cost of owning a home?

Your Taxes on real estate are considered real estate holding costs. These are the taxes levied on real estate by a local governing authority. However, your personal income taxes, capital gains tax, and federal taxes are not part of your real estate carrying costs.

Final Thoughts

Real estate carrying costs are those costs that the property owner is responsible for paying while they own the investment property. Typically, these real estate carrying costs are paid monthly and include things like Taxes on real estate, insurance, mortgage payments, maintenance, and more. Both buy-and-hold and fix-and-flip investors have carrying costs and need to incorporate them into their budget.