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September 19, 2018

Carrying Costs on Real Estate Investments

PUBLISHED SEPTEMBER 19, 2018

A licensed real estate broker in Florida, Allison has fixed and flipped over 100 properties. Her expertise is featured across Fit Small Business in real estate investing, real estate financing, and rental property content.

Real estate carrying costs are the costs an owner must pay on an investment property during the time he or she owns it. The most common carrying costs are paid monthly and include utilities, mortgage payments, taxes, property insurance and more. These carrying costs apply to both fix-and-flip investors and buy-and-hold investors.

What Are Carrying Costs on a Real Estate Investment

Real estate carrying costs are the recurring costs that the property owner is responsible for during the duration of owning the property. Real estate holding costs are typically paid monthly and are important because they affect the investor’s bottom line because they’re part of the monthly budget as well as a factor when deciding on a property acquisition budget.

Many investors who purchase an investment property forget to include all of their carrying costs and only include the acquisition and rehab costs. It’s important to include other real estate carrying costs like utilities and management fees because they affect everything from your budget, return on investment (ROI) to your cash flow and your cap rate. They also help determine what amount of rent you need to charge if you have a rental property.

Carrying costs are your recurring, usually monthly, costs associated with owning a property. Unlike, operating expenses, carrying costs include your mortgage payments. Think of them as the cost of doing business. You pay these holding costs while you own the investment property.

Standard real estate carrying costs include:

Your mortgage payments
Insurance
Property taxes
Maintenance
Homeowners’ association (HOA) dues

However, some investors also consider marketing costs as holding costs if they’re done on a recurring basis. There are different carrying costs for two types of investors, fix and flippers and buy-and-hold investors.

The two types of real estate carrying costs are:

1. Real Estate Carrying Costs for Fix and Flippers

A fix-and-flip investor purchases a property, with the intention of rehabbing it and selling it for a profit. The real estate holding costs are the costs associated with keeping the property prior to selling it. These carrying costs are factored into the fix and flipper’s budget. They need to know how much the carrying costs will be, so they know how much it will cost to flip a house.

Fix-and-flip carrying costs generally consist of:

Property taxes: 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 property taxes from your local property tax office, Zillow or your real estate agent.
Property insurance: Vacant or unoccupied property insurance is usually required by your lender while you’re fixing up the property. A typical vacant property insurance policy will cost $1,842 or more for the year, and most companies prorate it if you sell the property within the year.
Mortgage payment: Generally, a fix and flipper will use a hard money loan, which is a short-term interest-only loan that funds the acquisition and rehabilitation of the property
Utilities: This is the number one carrying cost that fix and flippers forget to include in their budget. Contractors need electricity and water in order to work and may need heating or cooling depending on the time of year. Don’t forget about monthly trash collection fees as well. Utilities vary depending on usage, property size and property age. Typically, new properties are more energy efficient so have lower utility costs.
HOA fees: If your fix-and-flip project is part of an HOA, then you’re responsible for the fees from the time you purchase the property until you sell it. These fees vary depending on property location, size and amenities included.
Marketing fees: Some investors consider marketing fees part of your carrying costs and others don’t. These fees would be costs involved with advertising the property for sale, holding open houses and for items like flyers and bandit signs.

Keep in mind that rehab costs, acquisition costs and real estate agent fees are not usually considered carrying costs because they are one-time fees and not accumulated on a recurring basis.

If you’re an investor in need of a hard money loan, contact Kiavi. It’s a reputable, nationwide online lender that offers competitive rates to prime borrowers. Its application process is seamless, and it can prequalify you in just a few minutes.

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

Buy-and-hold investors generally purchase an investment property with the intention to keep it and rent it out for five or more years. This is different than fix-and-flip investors who purchase the property and want to sell it quickly. Specifically, buy-and-hold investors typically have higher utility costs and lower insurance costs.

Buy-and-hold real estate investors also have ongoing maintenance and repairs that a fix and flipper won’t have because they’re selling the property. Another carrying cost that some investors include is property management fees.

Buy-and-hold investment property carrying costs include:

Property taxes: 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 property taxes from your local property tax office, Zillow or your real estate agent.
Rental property insurance: Rental property insurance is different than homeowners’ insurance and the policy generally includes loss of income, peril coverage and liability. A typical policy costs $1,473 to $1,596 per year.
Mortgage payment: An investment property loan typically consists of interest and principal and rates generally start at 4.5 percent. The purchase price and the rate are used to determine the monthly payment.
Utilities: A buy-and-hold investor will typically pay any common area utilities and, sometimes, the water bill, which would be indicated in the lease. Common area utilities may include electric in the hallways of an apartment building or water for an outdoor sprinkler system.
Maintenance: This is the recurring costs to upkeep the property like cleaning the gutters, snow removal, painting and changing locks — things typically done on a monthly basis. This does not include your repair or rehab costs.
HOA Fees: If your rental property is part of an HOA, then you’re responsible for the fees from the time you purchase the property until you sell it. These fees vary depending on property location, size and amenities included. You may have tenants pay the HOA fees, but this isn’t typical.
Property management fees: This is the monthly amount that you pay a property manager or management company to manage your property, collect rents and lease units. Generally, these costs are 8 percent to12 percent of the gross collected rents.
Marketing fees: These costs are typical with short-term rentals and vacation rental properties and include Airbnb fees, advertising costs and any recurring marketing expenses.

If you’re interested in financing a rental property, contact Visio Lending. It’s a reputable, nationwide online lender that offers competitive rates to prime borrowers. It can get you prequalified in just a few minutes.

Examples of Real Estate Carrying Costs

Let’s look at a couple of examples of carrying costs and how they affect your ROI on a fix-and-flip project and a buy-and-hold property. Let’s assume that that the purchase price is $200,000 for both examples.

Let’s assume the following costs on a fix-and-flip project:

Acquisition Costs
Down payment: $20,000
Closing costs: $10,000
Mortgage amount: $180,000
Total Acquisition Costs: $210,000

Monthly Carrying Costs
Mortgage payment: $1,200
Property taxes: $200
Property insurance: $150
Utilities: $100
HOA fees: $100
Marketing fees: $100
Total Monthly Carrying Costs: $1,850

Now, let’s assume that it takes you three months to rehab and sell the property, your rehab and costs to sell the property are $30,000, and you sell the property for $300,000

Your total investment is your carrying costs times three plus your acquisition costs plus your rehab and sales costs.

$1,850 x 3 = $5,500
$5,500 + $210,000 + $30,000 = $245,500, which is now your total investment

To figure out your ROI, divide your profit by your total investment and multiply by 100 to get a percentage.

Your profit is the sales price minus the total investment
$300,000 – $245,500 = $54,500 profit
$54,500/$245,500 = 0.22 x 100 = 22.2 % ROI

This shows the profit from one deal, which is generally how fix and flippers calculate ROI on a per property basis.

If you want to figure out your potential ROI on a fix-and-flip project quickly, check out our free house flipping calculator.

From this example, you can see what your total monthly carrying costs are and that they play a significant role in calculating your budget to buy a property and your monthly budget. They also affect your ROI. The shorter your timeline, the lower your carrying costs, the higher your ROI, all other things being equal.

Now, let’s see how carrying costs affect your ROI for a buy-and-hold rental property. Let’s assume that your total monthly rental income is $2,000 and the following costs are:

Acquisition Costs
Down payment: $20,000
Closing costs: $10,000
Mortgage amount: $180,000
Total Acquisition Costs: $210,000

Monthly Carrying Costs
Mortgage payment: $965
Property taxes: $200
Property insurance: $125
Utilities: $120
HOA fees: $100
Maintenance: $100
Property management fees: $160
Total Monthly Carrying Costs: $1,770

Your total investment is your carrying costs times 12 — because we’re calculating annual ROI — plus the cash portion of your acquisition costs. If you include your mortgage, your ROI will be negative for year one.

$1,770 x 12 = $21,240
$21,240 + $30,00 = $51,240 Your total cash investment

Your cash flow is your monthly rental income minus carrying costs
$2,000 – $1,770 = $230 your monthly cash flow

Your annual return is your monthly cash flow times 12 because there are 12 months in a year.

$230 x 12 = $2,760 annual return
ROI = Annual return / Cash investment
$2,760 / $51,240 = 0.0538 x 100 = 5.38% ROI

As you can see from the example above, your real estate carrying costs play a significant role in your budget, and they affect your ROI. You need to know approximately what your real estate carrying costs will be, so that you can set your rental price properly.

Tips on Managing Real Estate Carrying Costs

It’s important for real estate investors to manage their carrying costs because they are part of their budget and, if they don’t manage them properly, they will go over budget. This means that their ROI will be decreased, and so will their cash flow. For example, if you forget to include monthly utility costs in your budget, you may end up being cash flow negative or have to find the funds to pay the utility 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 tips on managing real estate carrying costs.

Tips for managing real estate carrying costs include:

Understand Your Real Estate Holding Costs Upfront

Investors should understand their real estate carrying costs upfront so they know if they can afford the property, what their budget should be and how much they should charge for rent.

“As an investor, it is imperative to know your carrying costs so you have a full understanding of what your financial obligation will be to the property. The goal is always to have the rents pay the carrying costs, plus bring in additional revenue for your investment. Crunch the numbers and crunch them again. Ensure that the property is inspected thoroughly prior to purchase. The last thing an investor wants is to close on a property and have major mechanicals break down. That is where carrying costs that are unforeseen double and triple!”
— Lindsay Stevens, Associate Broker, Stevens Realty Group

Include Renovation Costs in Your Real Estate Carrying Costs

Renovations can have a major impact on your real estate holding costs. Investors often overlook additional financing costs and utility costs when renovations run over the allotted timeline.

“Renovation project that extends past your budgeted time frame can have major financial implications including higher interest costs and holding costs, which impacts overall profit negatively. Often investors underestimate the acquisition and disposition costs. It’s important that investors account for general maintenance, utilities and interest costs to have an accurate budget.”
— Larry Friedman, Principal & Co-founder, SDF Capital

Rehab Supplies Impact Real Estate Carrying Costs

When a property is vacant, theft is typically higher than when the property is occupied. Theft occurrences can increase your carrying costs and potentially decrease your ROI.

“The risk of theft and vandalism is typically higher when flipping property than with other vacant properties. Even your contractors can carry away supplies that were not used and could have been returned for a credit. So, keep an inventory of supplies and make sure your property is secured properly to reduce your carrying costs.”
— Bruce Ailion, Real Estate Agent & Attorney, RE/MAX Town and Country

Holding Costs Real Estate Frequently Asked Questions (FAQs)

Below we are going to answer some of the most frequently asked questions about real estate carrying costs.

How to Find My Real Estate Carrying Costs?

Carrying costs are made up of several components including utilities, property taxes, 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 property taxes prior to purchasing the property by looking at Zillow or contacting your local property tax office.

How Long Do You Pay Real Estate Carrying Costs?

You pay for real estate holding costs for the duration of time that you own the property. Keep in mind these carrying costs don’t include your acquisition costs like down payment and closing costs. However, they include the costs of owning and maintaining the property. These costs are your responsibility until you sell the property.

Are Taxes Considered Real Estate Holding Costs?

Your property taxes 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.

For more information on real estate tax deductions, check out our guide on rental property benefits and deductions. It also comes with a free worksheet.

The Bottom Line

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 property taxes, 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.

If you’re ready to get an investment property loan and want to know what the monthly mortgage payment portion of your real estate carrying costs will be, contact Kiavi. It’s a nationwide, online hard money lender that offers fix-and-flip loans with competitive rates for prime borrowers. Get prequalified in just a few minutes.