Carrying costs are monthly expenses an owner is required to pay for an investment property during ownership. Common carrying costs are utilities, taxes, property insurance and mortgages.
These are expenses an owner is required to pay on an investment property while they own it. Common carrying costs such as utilities, taxes, property insurance and mortgages are paid monthly. Not only do these costs apply to the standard buy and hold investors, but the fix and flip ones as well.
Related: Buying a house? Make sure you’re prepared by reading our complete home buying guide.
How Do Carrying Costs Affect Your Investment?
First time investors often forget about these costs when buying the property, and it could provide them with a false expectation for their return on investment. The most common expenses are often forgotten when factoring in their monthly budgets. It would be an unwelcome surprise to be a few months in, suddenly paying costs you hadn’t anticipated, now operating at a loss.
So before you proceed with an investment purchase, make note of these carrying costs in particular, which apply to both “buy and hold” and “fix and flip” properties:
- Property Taxes: This is imposed taxation performed by the governing district on a property. The amount of taxation, though, is dependent on variables such as location, size and the property’s value. If you’re searching for the rates that will apply to your property, they can be found on Zillow or through your Realtor.
- Utilities: Often forgotten by fix and flippers, this is a must to factor into your budget. Contractors need basics such as water and electricity year round to work. Depending on the season, heating and cooling costs play a role as well. Luckily for newer and more energy efficient properties, utilities costs are now slightly lower than they have been.
- Property Insurance: This can differ between rental property insurance or vacant property insurance. Depending on whether you’re simply holding the property or flipping it, vacant insurance costs slightly more than rental. But you have to take into account the potential damages that may occur from renting, and what is specifically covered in the policy.
- Mortgage Payments: Like insurance, the cost and rates for your mortgage are influenced by what your intend to do with the property. A fixer upper will require a short-term hard money loan that funds the purchase and rehabilitation of the property. If you’ve registered the property for investment purposes, interest rates typically start at 4.5 percent and compose a principle as well.
- Homeowners’ Association Dues or HOA: Be sure to check if the property is part of an HOA. Know all the fees before purchasing. The price can be influenced by amenities that are included in the development, location and size; fees must be paid monthly.
- Marketing Fees: The cost of marketing should be considered if you plan on promoting it extensively for sale, since the costs of advertising, showings and open houses add up over time.
Below are some extra fees to consider if you’re a buy and hold investor:
- Maintenance Costs: As the name suggests, the carrying costs relate to general upkeep of the property. The type of upkeep can differ based on your location but they generally follow a similar pattern. Whether it’s cleaning gutters, painting or landscaping, these costs should be considered within your monthly budget.
- Property Management Fees: Management companies can be costly, but will save you in the long term. Expect to pay around 10% of your monthly gross rental income for their services.
In the end, carrying costs can accumulate to an unfavorable number if you wish to purchase an investment property. Still, if you plan on buying one, make sure to take these costs into account as they play a huge factor in determining your future ROI. If not, they can come back to bite you.