Buying real estate investments can generate significant returns, but it comes with risks. One of the main hazards is holding onto an inappropriate property for a long time. The costs accumulated during this period can quickly build up, diminishing your profits and potentially leading to financial setbacks.
This guide aims to shed light on the concept of holding costs and their potential impact on your overall earnings. In addition, we have developed a checklist for investors and property flippers that outlines common issues and expenses related to holding properties. Keep reading to find out more!
What are Holding Costs?
Holding costs are expenses associated with owning a property that you plan to sell or rent out. These expenses include mortgage payments, property taxes, insurance, utilities, maintenance, repairs, and more. Essentially, any expense that you incur while holding onto the property is considered a holding cost.
Why are Holding Costs Important?
The significance of holding costs lies in their ability to greatly affect your profitability. If you keep a property for an extended period, your holding costs can consume your profits or potentially lead to financial loss.
For example., suppose you spend $1,000 per month on mortgage payments, property taxes, and utilities, and it takes you six months to sell the property. In this scenario, your holding costs would amount to $6,000. If your initial plan was to earn a profit of $20,000 from the sale, your actual profit would now be reduced to $14,000.
The costs of holding can also have an effect on the profits you make from your investment. If you keep a property for a long time, your return on investment (ROI) will be less. For instance, if you plan to sell a property quickly to get the most out of your ROI, it is important to do so. However, if you hold onto the property for an extended period, your ROI will go down.
Holding Cost Checklist for Investors and Property Flippers
In order to assist you in avoiding the typical mistakes related to holding costs, we have developed a checklist specifically designed for investors and property flippers in Baltimore. Utilize this checklist to guarantee that you are considering all the expenses associated with holding your property.
- 1. Mortgage payments: If you have a mortgage on the property, be sure to factor in the monthly payments.
- 2. Property taxes: Property taxes can vary widely depending on the location and value of the property.
- 3. Insurance: Property insurance can protect you in case of damage or loss, but it comes at a cost.
- 4. Utilities: Utilities like electricity, water, and gas can add up quickly, especially if the property is vacant.
- 5. Maintenance and repairs: Properties require ongoing maintenance and occasional repairs. Be sure to factor in the costs of routine maintenance like lawn care, cleaning, and HVAC maintenance, as well as unexpected repairs.
- 6. Property management fees: If you’re renting out the property, you may need to pay a property management company to handle tenant issues and collect rent.
- 7. Homeowner association (HOA) fees: If the property is part of an HOA, you’ll need to pay monthly or annual fees.
- 8. Vacancy costs: If the property sits vacant for any period, you’ll need to factor in the costs of keeping it secure, maintaining landscaping, and paying utilities.
- 9. Opportunity cost: The longer you hold onto a property, the more you’re missing out on other investment opportunities. Be sure to factor in the opportunity cost of holding onto the property.
In Summary,
Holding costs are an important factor to consider when investing in real estate. They can quickly eat away at your profits and impact your ROI. By using the holding cost checklist provided in this guide, you can ensure that you’re factoring in all of the holding costs associated with your property. This will help you make more informed investment decisions and maximize your profitability. Do you have questions about buying or selling real estate? Reach out to our Baltimore Cash Buyer LLC to find out how we help investors and property flippers!