Holding costs or ‘carrying costs’ are the hidden costs which can tear into the profit margins of a property flip.
Worse still, holding costs can wipe out profits completely.
This normally happens when they have been grossly underestimated.
It may also occur as a result of a poorly planned or executed exit strategy.
The basic premise of a flip is to source, buy, renovate and sell a property for profit.
But that profit can quickly dwindle away due to holding costs.
That’s why project timelines are so important.
Every day a flipper holds a property without selling it or being paid rent, they are losing money.
The most obvious holding cost expense is interest payments.
But there are other holding costs to consider which can compound losses and make an entire redevelopment a waste of precious time, effort and money.
The different types of holding costs
There are many different costs associated with holding a property in California.
They can vary dramatically across different property types and markets.
That is why it is so critical to have multiple exit strategies that result in the disposal or rental of a property.
Imagine Liam has a $150,000 downpayment and takes out a hard money loan of $600,000.
It allows him to buy a property for $600,000, leaving $150,000 to spend on renovations.
Here is a breakdown of all the different types of holding costs:
Interest payments
Hard money interest payments typically swing between 8-12% annually.
The $600,000 loan at 10% costs $5,000/month and may also attract loan servicing and draw fees.
Property taxes
Standard property tax is assessed at 1% of the purchase price of the property in California.
If Liam redevelops and sells the property within 180 days, his taxes total $2,958.
If he requires a further 30 days to sell the property, those taxes rise to $3,452 or a daily increase of $16.43.
Supplemental property tax
This is a tax on the appreciation in value of the property in the financial year on a prorate basis. It is normally calculated at 1%.
Hence if the property rises in value from $600,000 to $800,000 in the last three months of the financial year, $500 tax will be payable.
The tax is levied against the property and its owner as of June 30.
It should be taken into account by flippers when they sell.
Additional local levies
Some jurisdictions or developments may impose or attract additional fees and levies such as Mello-Roos taxes.
Utilities
Water, electricity, gas and even internet fees can quickly add up and can be expected to accumulate in the order of between $150-$500 monthly.
Insurance
Builder’s risk and vacant property insurance costs between $100-$350 per month depending on the location and level of coverage.
HOA (Homeowners Association) fees
These apply to condos, townhomes and gated communities and cost between $200-$700 monthly.
General maintenance
Expect to pay between $100-$300 per month for security, garden upkeep, trash removal and pool servicing fees if required. Increased security including fencing and cameras in high-crime areas can significantly increase these costs.
Staging
Luxury properties may require staging at a cost of between $1,000-$3,000 per month.
Site supervision
For bigger redevelopments, the hiring of project management or site supervision professionals can eat into margins at between $2000-$5,000 monthly.
Marketing
While not specifically a holding fee, selling the property is another expense and should be factored into costs. Expect to pay anywhere between $500-$3,000.
Opportunity cost
This intangible cost is the cost of missing out on working on your next property while your money is anchored to your current one.
How much to budget for holding costs
Accurately calculating holding costs is imperative when planning a profitable flip.
But it relies on successful exit strategies that run to time.
Always formulate multiple exit strategies to guard against unexpected problems.
For fix and flip properties, the industry rule of thumb is to budget for six months of holding costs.
This allows enough of a buffer to be built into your budget in the event of unforeseen delays.
Permit or inspection delays are indirect holding costs that can seriously drag out your timeline and do serious damage to your bottom line.
There are several ways to estimate your holding costs.
The simplest is to calculate 1.5-2.5% of the purchase price of the property, per month.
For Liam’s $600,000 property, that’s $9000-$15,000 monthly or a total of $54,000-$90,000 over six months.
Another method is to calculate 1-2% of the property’s ARV, per month.
For Liam, that’s $8,000-$16,000 or $48,000-$96,000 over six months.
The most accurate way is to meticulously calculate all monthly expenses including mortgage payments, property taxes, utilities, insurance and all other fees and levies.
But remember, always underestimate, budgeting for worst-case scenarios and allowing yourself plenty of margin for error.
It’s a good idea to factor in $10,000 worth of unforeseen costs and a 10% drop in expected resale value.
Examples of typical monthly holding costs
Typical holding costs vary significantly across property types and regions in California.
But as a rough guide, expect monthly holding costs to fall in the following ranges:
Single-family homes: $800-$2,200
Condos/townhomes: $900-$1,800
Multifamily residential units (2-4): $1,400-$2,900
Luxury homes ($1M+): $2,500-$5,500
Get finance WITH strategy for your savvy flip
Time is money.
That’s why meeting timelines and building generous buffers into your holding costs is the best way to protect your profit margins.
Underestimating timelines and not allowing for building delays caused by bureaucratic red tape and bad weather are the biggest mistakes flippers make when calculating holding costs.
Working six months for next to nothing is no way to run a business but it doesn’t have to be that way.
That’s why a chat with the real estate professionals at Equidy might be the smartest decision you can make.
Equidy has had an intimate and personal history with all aspects of real estate and property development in California for more than 40 years.
They are the ideal partner to engage for your flipping and real estate development projects and will act as your mentor, offering sage advice ensuring you accurately estimate your holding costs and dispose of your projects on time and with a tidy profit.
They won’t let you fail!
Best of all, Equidy doubles as a private money lender, offering fast funding and flexible terms to flippers and developers.
They stand by their core belief that anything is possible and they are determined to prove it every single day.
Even in difficult economic times, they love to reward entrepreneurship and strive to see their clients realize their wealth creation dreams.
Equidy enjoys long and established relationships with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimise the risk to all parties.
Apply now (it only takes a few mins) or book your free strategy call.
