Whether you are buying, selling, flipping, or renting, holding costs can be a hidden part of your daily expenses that are often absorbed, but should never be forgotten.
What are holding costs?
Holding costs (also knows as carrying costs) – Are costs or expenses associated with owning or maintaining a property that an individual or company incurs during a specified period of time.
Some examples of holding costs are:
- Wear and Tear
- Municipal Charges
- Interest on income
To put this into a real life perspective:
People often hold out for higher dollar amounts not knowing that they are actually losing money in the long run. In other words, let’s say you have your home listed for $150,000 and you get an offer for $145,000, but decided to hold out for another buyer to come along and pay you $147,000. In this scenario, you made $2000 more on the sales price. However, if it took you 3 months of Holding Costs to make the extra $2000 in sales price, those holding costs need to be calculated to see if your net profits are actually higher with the larger sales price.
Calculating Holding Costs:
In the above scenario, let’s assume that your annual taxes are $3600, your 3 month prorated holding costs for those taxes would be $900. Maybe your insurance for that period is another $300, while your utility costs are $700, and your cleaning, maintenance, lawn are, snow removal, paint touch-ups, and trash removal where another $600.
In this case, your out of pocket expenses for those three months of holding costs were $2500, thus exceeding the $2000 more in sales price that you received by holding out for a higher dollar amount which you received 3 months down the road, and essentially costing you $500 more than you may have realized had you sold your home 3 months prior for a lesser purchase price.
Factor in the time value of money, interest on your mortgage payments, interest on income from local savings bank for having that money deposited, and your true net loss in this scenario actually exceeds $500. As the time value of money suggests that your money today is worth more than the same amount of money in the future.
Other holding costs which are difficult to calculate are peace of mind and time. The peace of mind knowing that you have a ready, willing, and able buyer today can be very valuable not having to worry about finding someone to pay you a little more money several months from now. Time is important, as during any ownership period, the more time that lapses, the more likely you are to have additional unexpected costs such as plumbing problems, furnace or air condition trouble, roofing leaks, or appliance repair.
So, lesson learned here is to be smart about your negotiations in any real estate transaction, but more importantly be aware of your holding costs, as you may actually end up losing money in the long run by holding out for a slightly higher sales price in the future.
For a free evaluation of your home or to talk in more detail about your homes holding costs.
Please contact Brandon J. Renzi.