Flipping: What Carrying Costs?

This is because the longer you hold a property, the more carrying costs you will incur. Carrying costs include any mortgage payments, insurance payments, and taxes that you have to pay while the property is still in your name. While some carrying cost will be unavoidable, letting costs get out of hand can seriously put a dent in your profits or wipe them out altogether.

We've all heard it said that you have to spend money to make money. This is true when it comes to real estate investing, but most of the money that you spend will earn a return. Unfortunately, carrying costs are one of those expenses that will only cost you money and will never make you a dime. For this reason, most investors try to keep their carrying costs at a minimum. They renovate quickly, within a month or two, and get the house sold before carrying costs have a chance to eat away at their profits.

The biggest carrying cost associated with real estate investing is the mortgage payment. If you have the cash to invest in a property without taking out a loan, that's awesome. This will completely eliminate this carrying cost. But if you're like most investors, you just don't have enough free capital to purchase the property with cash. This means that you will be responsible for a mortgage payment until the property sells.

The average loan payment for a $50,000 investment ranges anywhere between $300 to $400 depending on your interest rate and a variety of other factors. If you finance your remodeling budget also, you could quickly be looking at a $700 per month payment on a relatively low-budget investment. Hold this property for just six months and these costs could add up to $4,200.

Insurance is another carrying cost that can put a serious dent in profits earned through real estate investing. The bottom line is this: you have to insure the property against damage, theft, fire, and water damage. Not doing so can leave you without hope of cutting your losses after a disaster or unfortunate accident. Your insurance premium will depend largely on how much it will cost to replace the structure and the region or area where the property is located. Even if insurance charges are minimal, $1,000 or so for a year's coverage, that's more money that you won't see at the end of your investment.

You might think that property taxes are the least of your worries, but if you time your real estate investing strategy just right, you could completely avoid these costs. Real estate taxes are due biannually. Avoid holding the house when these become due, and you can avoid dipping even further into your profit margin.

Remember; when it comes to real estate investing and carrying costs, the key is to avoid them whenever possible. When avoidance is not possible, flip the property quickly before they impact your wallet in a big way.

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