Carry costs are any expenses the owner must pay on investment property over the course of owning it. These costs usually include utilities, debt service payments, taxes and insurance, among other items.
Carry costs are important to quantify because of their effect on a property’s budget and cash flow, thus influencing return on investment (ROI) and cap rate. Knowing the carry cost of a property may also help determine how much rent to charge a tenant, given one will know how much their expenses will be by just owning the property.
Carry cost is also called carrying cost or holding cost. It is called holding cost because it is a recurring (usually monthly) amount the investor has to pay while holding the property. Carry cost is a liability incurred for owning or holding the property.
Whether the investor is buying a property as a fix-and-flip or planning to generate income from it by renting, carrying costs still exist. For a fix-and-flip, the investor will want to flip the property as fast as possible. As each month goes by, the investor’s return decreases because of carry cost.
For an investor who is buying the property to generate income, carry cost might be rolled into operating cost. Unlike the fix-and-flip investor, carry cost doesn’t impact the rental owner in the same way. To generate income, carry costs must be incurred. The rental owner almost has no choice incurring carry costs. The fix-and-flip investor does have some control over how soon the property is sold (i.e., flipped).
Carry cost can impact the rental owner in a similar way as the fix-and-flip investor when a rental unit goes vacant. Now the rental owner is carrying dead weight. There is no income to offset the carry cost of the unit.
Both investors will want to estimate carrying cost and build it into their projections. Depending on many variables such as location, city, loan type, and property class, carry cost can vary greatly.
