What are Holding Costs?
What are Holding Costs in Real Estate?
Holding costs are all the recurring expenses associated with owning property. They are usually paid monthly and include things such as:
- Financing payments
- Property taxes
- Gas, electric, water
- Trash collection
- HOA or condo fees
Some real estate investors will include marketing expenses into their holding costs if the marketing expenses are paid on a recurring basis. Holding costs do not include expenses related to buying and selling the property, such as lender’s fees, Realtor commissions, closing costs, inspections, surveys, home warranties, and MLS listing fees.
Holding Costs for Fix-and-Flip Properties
If an investor plans to rehab and flip a property, it’s important to factor holding costs into the project budget. In most cases, holding costs for a flipped property include:
Loan Payments: Whether a real estate investor uses a short-term, interest-only hard money loan to cover the cost of buying and rehabbing a property or a long-term, amortizing loan, the ongoing loan payments (aka – debt service) is a common holding cost for most properties.
Property Taxes: Every property requires the payment of taxes to the local municipality. Property tax records can be found at the local tax assessor’s office or from data services like DataTree or AgentPro247.
Insurance: Most lenders will require property insurance, whether the property is vacant or occupied. Most of the time, the insurance company will prorate the premium if the property is sold within a year.
Utilities: This expense is often overlooked in holding cost calculations, but it can add up quickly, especially in older, less energy-efficient properties. A real estate investor may also have to pay separate monthly gas, electric, water, and trash collection bills.
HOA or Condo Fees: These can also be quite expensive depending on the property size and location and whether snow removal, landscaping, and maintenance fees for common areas such as pools and parks are included.
Marketing Costs: Some investors account for marketing in their operating expenses; others factor them in as holding costs. Marketing costs include things such as digital advertising, signs and flyers, and open house expenses.
Holding Costs for Buy-and-Hold Properties
Holding costs are essentially the same for fix-and-flip and buy-and-hold properties, but with a couple of exceptions.
Rental Insurance: Most landlords and owners of buy-and-hold investment properties will buy hazard and liability insurance. A supplemental umbrella policy may also be a good idea if the investor’s personal net worth exceeds the liability limits on the policy. Landlord insurance costs about 25% more than a typical homeowner’s policy.
Property Management Fees: If a property owner is paying an agency to manage the property, these fees are also part of their holding costs. Most management firms charge between 8% and 12% of collected rents, plus potential additional fees for vacant units, new tenant placement, and maintenance if it’s included in the property management agreement.
Marketing Costs: If the property is a vacation or short-term rental such as an Airbnb, the property owner may have ongoing monthly marketing expenses. For long-term rentals, especially if there is a management company involved, there may not be marketing expenses.
How to Calculate Holding Costs for an Investment Property
The calculations are straightforward for buy-and-hold investment properties; the investor can simply add up all the recurring monthly expenses and multiply them by 12 months to find their annual holding costs.
For fix-and-flip properties, an investor needs to estimate the length of time they will hold the property for renovation and improvements plus an extra period to sell and close on the home. Six months is usually a good rule-of-thumb estimate and allows for time to show and sell the property.
If the monthly holding costs on a fix-and-flip are $2,000, for example, the selling price needs to cover all of the purchase, rehab, and selling costs, plus about $12,000 in holding costs to break even if the project takes six months from purchase to sale.