Real estate investors juggle a lot of numbers. The purchase or acquisition price is one, but other costs factor into your return on investment including your rehab and carrying costs in a real estate investment. Most investors can figure out their rehab costs and how they relate to the selling price, but what about the carrying costs?
Carrying costs are important to your bottom line. They determine how much the home costs overall. Whether you fix and flip or buy and hold, the carrying costs affect your profits or lack thereof if you aren’t careful.
So what are the most common carrying costs? Check out the list below.
Carrying Costs All Investors Pay
All investors, both fix-and-flip and buy and hold investors usually pay the following carrying costs:
-Mortgage or loan payment (principal and interest)
-HOA fees (if applicable)
-Property insurance
-Real estate taxes
-Utilities
Fix and flip investors typically pay lower carrying costs because they usually only hold the property for a few months, or until the rehab is complete.
Carrying Costs For Fix And Flip Investors
Fix and flip investors must consider carrying costs in a real estate investment when they bid on the home and when they price it to sell. The longer rehab takes the more carrying costs you pay.
For example, fix-and-flip investors often have a hard money loan. Consider the total interest you’ll pay plus the cost of vacant or unoccupied homeowner’s insurance and the utilities cost while rehabbing and selling the home. Don’t forget, contractors need access to water, electricity, and heat/air depending on the weather. Plus the home should be completely functional when you put it on the market.
Carrying Costs For Buy And Hold Properties
Buy and hold investors pay the same carrying costs in real estate investments, but for longer periods. Most investors keep investment properties for at least five years when renting it out.
Buy and hold investors usually have a loan, which means interest fees. They must also carry the landlord’s insurance, which costs more than vacant property insurance. Many buy and hold investors have other carrying fees too, including:
Maintenance and upkeep – Keeping the home in good condition is your responsibility. The cost of regular maintenance and sudden repairs take away from your profits and are a carrying cost.
Management fees – Do you pay a management company to manage your renters? Do they collect payments and handle phone calls? You’ll pay a monthly fee to the management company, which is a carrying cost.
Utilities – If you include utility payments in your lease, they are a part of your carrying costs. Make sure to also include the utilities you pay for common areas.
Marketing fees – If you have short-term rentals or even annual leases include the marketing fees in your carrying costs. This includes all occasional advertising and ongoing marketing fees.
Calculating Carrying Costs
So how do you use the carrying costs? First, you must determine your acquisition and your carrying costs separately. Then you use both numbers to determine your ROI.
For a fix-and-flip, your acquisition costs include:
-Down payment
-Closing costs
-Mortgage balance
Next add up your carrying costs, as we talked about above. Multiply the monthly amount by the number of months you ‘carry’ the home. Let’s say it takes 4 months to fix and sell it. You’d pay your carrying costs for 4 months. Add the carrying costs to your acquisition costs and the rehab costs.
Next figure out your ROI by dividing your profit (sales price – (acquisition cost + carrying cost + rehab cost)) by the total investment.
If you buy and hold the property, you’ll figure in your monthly cash flow (rental income). Because you keep the property, multiply your carrying costs x 12 months. Also, multiply your monthly rent collected x 12 months. The difference between the rent collected and your carrying costs is your monthly cash flow.
Your ROI for a buy and hold is the annual return (monthly cash flow x 12) divided by the total of your down payment and closing costs.
Carrying costs play an important role in your investment decision. They affect your return on investment and determine if an investment makes sense. The less time you hold onto a property, the higher the return on investment is because you have fewer carrying costs.
Pay close attention to a home’s carrying costs in real estate investments before making an investment decision to make sure it makes sense. If you’re buying a fix-and-flip, make sure you can sell the property for more than your total cost including carrying costs. If you will buy and hold, make sure you can charge enough rent to cover the carrying costs and increase your ROI.