Holding Costs Revisited

twilson23 — Sat, 06 Mar 2010 00:10:59 +0000

I want to spend a little more time explaining the importance of holding costs. Let’s say you purchased a $100,000 property for $70,000 and you expect it to cost $10,000 for repairs and $6,000 to list the property with a real estate agent. Let’s suppose you did not use a real estate agent when you purchased your investment. That leaves you a profit of $14,000, right? I’m aware these are not necessarily the numbers that professional real estate investors are looking for. I chose these numbers because it makes the point well. Now suppose you expect your rehab time to be two months. Also, your research shows that 60 days is the average amount of days on the market for homes in the neighborhood. Therefore, if everything goes as expected, you will have a holding time of four months, two for rehab and two for the sale. Now let’s throw some holding time expenses into the mix. Keep in mind that these expenses vary drastically from city to city. If my numbers are greatly different from those in your area, just keep in mind this is merely an example. The same concepts apply anywhere.

Acquisition Price 70,000
Rehab Expense 10,000
Real Estate Agent 6,000
______________________
Total Expenses 86,000
(Excluding Holding)
Expected selling price 100,000
Profit Amount 14,000

During the rehab you will need electricity, water, and trash service (all which total $300 per month). You also have to keep up with your mortgage payment which is $665 per month. The taxes average $100 per month and the insurance averages $50 per month.

Utilities- 300 per month X 4 months = 1,200
Mortgage Payment- 665 per month X 4 months = 2,660
Taxes- 100 per month X 4 months= 400
Insurance- 50 per month X 4 months= 200
______________________________________________
Total Holding Expenses $4,460

Now let’s see this amount deducted from the profit amount displayed above-
14,000
- 4,460
_____
$9,540 Total Profit

Now this amount of profit may be fine for you. For many of us, that would not be enough profit. Keep in mind that the costs above are expected costs and the holding time is the time expected. If it takes longer to do the rehab or longer to sell than you expected, obviously, the holding expenses would be greater. I like to keep a good buffer in order to make up for any mistakes and/or unexpected expenses. What if you had not considered the holding expenses? I’m sure you can see how such a mistake could make a drastic difference? Always include holding expenses when running the numbers. One thing many people are guilty of when calculating their holding expenses, is that they don’t like the outcome, so they change the numbers. Make sure to be true to yourself and calculate using accurate numbers. Don’t get too excited about the property, only get excited about the deal if the deal is right.