Investing in real estate can make you a lot of money, but it also has its risks. One big risk is keeping the wrong property for too long. The costs of holding onto a property can add up fast, taking away from your profits and even making you lose money. In this guide, we’ll look at what holding costs are and how they can affect your earnings. We’ll also provide a holding cost checklist for investors and property flippers in Paducah and Surrounding Areas to help you avoid some of the most common pitfalls.
What are Holding Costs?
First off what are holding costs and how do they apply? Holding costs are the expenses that comes with owning a property that you plan to sell or rent out. These expenses can include mortgage payments, property taxes, insurance, utilities, maintenance, repairs, and so much more. Essentially, any expense that you incur while holding onto the property is considered a holding cost. These costs can add up quickly.
Why are Holding Costs Important?
Holding costs are important because they can really affect how much money you make. If you hold onto a property for too long, your holding costs can eat away at your profits or even cause you to lose money. For example, if you’re paying $1,000 per month in mortgage payments, property taxes, and utilities, repairs and so on, and it takes you six months to sell the property, your holding costs will be $6,000. If you were planning on making a $20,000 profit on the sale, your actual profit will now be reduced to $14,000. When you look at the effects from this angle holding onto a property is not in your best interest.
Holding costs can also impact your return on investment (ROI). It’s basic math, addition and subtraction. The longer you hold onto a property, the lower your ROI will be. If you’re planning on flipping a property, for example, you’ll want to sell it as quickly as possible to maximize your ROI. However, if you hold onto the property for too long, your ROI will decrease.
Holding Cost Checklist for Investors and Property Flippers in Paducah and Surrounding Areas
To help you avoid some of the most common holding cost pitfalls, we’ve created a holding cost checklist for investors and property flippers in Paducah and Surrounding Areas. Use this checklist to ensure that you’re factoring in all of the holding costs associated with your property.
1. Mortgage payments: If you have a mortgage on the property, be sure to factor in the monthly payments. Make sure there are no late fees already on the mortgage loan that will need to be taken care of.
2. Property taxes: Property taxes can vary widely depending on the location and value of the property. Take the time to do some research on the taxes and if there are any back taxes owed.
3. Insurance: Property insurance can protect you in case of damage or loss, but it comes at a cost. The mortgage company will provide it but if you’ll look around you can usually come up with cheaper options.
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 all the other unexpected repairs. Try to think of anything that could go wrong. Things tearing up when you least expect it. New hot water heaters or replacing the flooring. Whether occupied or not there is always something that needs tending.
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, unless you plan to be that person as well. Although not unheard of it rarely pans out well.
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 of time, you’ll need to factor in the costs of keeping it secure, maintaining landscaping, paying utilities, and making sure it doesn’t have that closed up smell.
9. Opportunity cost: The longer you hold onto a property, the more you’re missing out on the ability of purchasing other investment opportunities. Be sure to mindfully factor in the opportunity cost of holding onto the property.
Holding costs are a major factor to consider when investing in real estate. They can quickly eat away at your profits and eat away at your ROI. By using the holding cost checklist provided in this guide, you can be asurred 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. If you have questions about buying or selling real estate in Paducah and Surrounding Areas? Reach out to our team to find out how we help investors and property flippers! (270) 551-2171