While real estate is an asset, it carries certain liabilities that an investor needs to pay for as long as they hold an investment property. These carrying costs eat into the returns, which is why an investor needs to factor them into their calculations before purchasing a property. These costs also vary depending on whether an investor is buying real estate as a short-term investment (ex. flipping houses) or for the longer term (such as holding a cash-flowing rental property).
When a buyer, be it an investor or a person intending to reside in the home, purchases a new home, whether a condo or a freehold property, they need to account for the carrying costs in their monthly budget.
Things to consider include insurance, maintenance fee (snow removal and landscaping), property taxes and utilities, and most importantly, they can vary from one season to another.
Types Of Carrying Costs
There are different types of carrying costs in real estate. You’ll need to factor each of these into the total costs of your investment.
- Financing costs, such as mortgage interest expenses and loan expenses. This one’s self-explanatory. If you’ve taken out a mortgage to finance the investment, you’ll need to factor in monthly payments as a holding cost. The type of loan you take out can greatly affect how much you pay. A lender will typically charge a higher interest rate for a “renovation-loan” type of loan, which adds up the longer it takes to complete the project.
- Property insurance. There are different types of insurance depending on the situation. If you intend to renovate the property, keep in mind that the insurance premium of an unoccupied home often costs more than a typical policy on a primary residence. Here we detailed the carrying costs of a freehold property and a condo based on their purchased value.
- Utilities. Unless you’re renting and your tenants pay all utilities, you’ll need to keep the water, electricity and/or gas on. If you’re curious about a property’s utility bills, you can call the utility companies to see if they’ll give you info on the property’s current bills. You can also request these bills from the seller. The cost of some of these utilities may be higher during a renovation than when the house is being lived in. For instance, the furnace can be cranked up to keep the humidity down even as contractors leave the doors and windows open while working on various aspects of construction.
- Property Taxes. Property taxes vary from location to location. You’ll need to research online or visit the county assessor’s office to determine the amount in property taxes you’ll be required to pay.
Here we detailed the carrying costs of a freehold property and a condo based on their purchased value.
The lack of awareness of how much carrying costs you’ll pay can have a negative impact on property owners. These costs can fluctuate with seasons, changes in property value, and changes in the property. If you don’t account for these carrying costs, they can really eat into your profit.
Before investing, estimate all possible carrying costs and budget for them. If you’re flipping a property, this could look like being prepared to pay carrying costs for up to 6 months even if you suspect the property will sell sooner. For a rental property, these costs are ongoing for as long as you hold the property.
At In Black and White Real Estate Team, we are here to partner with our clients during their real estate transitions. We continuously strive to match their evolving needs by bringing insight that makes a difference. We provide innovation, expert advice and we enable our clients to focus on what is important to them.
If you are interested in buying a home, please give us the opportunity to show you all that we can do for you. Let us do the heavy lifting so that you can enjoy the experience.