Real Estate Investors Terminology. This week we look at Holding Cost and how to determine this value.
A successful Real Estate Investor has a good understanding of the key terms that Real Estate Investors use, what they mean, and how the values for the terms are determined. Once these keys terms are understood, then the Real Estate Investor can begin to understand and be successful in the Real Estate Investing business.
As a reminder, over the next several blog posts I will be digging deeper into the key terminology, explaining the meaning of them, and how they are determined. The last post in this series will bring it altogether to look at the potential profit or loss of a Real Estate Investment.
The terms we will be discussing are After Repair Value (ARV), Initial Purchase Cost, Repair Costs, Financing costs, Transaction costs, Buying & Selling costs, Holding cost, and Profit/Loss. Each of these terms is important and can have a big impact on the ability of and Real Estate Investor to make a profit. The potential profit or loss in a Real Estate Investment can be calculated by this formula:
After Repair Value – repair cost – financing cost – transaction cost – buying and selling costs – holding cost – initial purchase price = potential profit/loss
Holding Costs
Holding cost are the cost that is incurred to maintain utilities, pay taxes, and insurance during the period of time the property is first purchased through the final sale of the property. These costs are significant but many times are not thought about when calculating the cost renovating and selling a property.
A typical property renovation project will take about six months. Taxes on the property still need to be paid during this timeframe. Taxes on a $200,000 property will be about $5000 per year. Therefore, the tax cost for the entire project lasting six months will be $5000*6/12 = $2500 for six months. This would be roughly $420 per month
Utilities are another holding cost. The property needs to be heated or cooled during the renovation process. Contractors will need electricity and water to do their work. Sewage systems will be used etc. Typical utility cost will be about $300 month.
The property will need to be maintained as well. Lawns will need to be mowed or sidewalks and driveways will need to have snow removed. These costs vary but figure about $50 per month.
The last cost that needs to be figured into the project is the cost of insurance. Insurance is a must to protect the investor from liability due to accidents and from loss of property. The cost of insurance will vary depending on each individual property but you could plan on roughly $800 dollars for insurance. This would be approximately $70 per month.
The total of all these costs would be $420 + $300 + $50 + $70 = $840 per month. If the project last 6 months, then the total holding cost would be approximately $5000. This is a significant cost and definitively cannot be overlooked.
In my next blog, I will summarize all the costs and the potential profit or loss in a renovation project.