How to calculate double closing and holding costs of a property? This is another question Real Estate investors ask quiet frequently. So I’ll try my best to answer them here so others can benefit from the answers.
Holding costs are what the property will cost you while you are trying to get it fixed up and rented or sold on the market. If you are in a soft market, or a time that it’s hard to sell, you might also figure in an amount slightly under value when you sell. This way, you’ll be able to cut down on your hold time and costs. I always try to put a property on the market for around $3000 to $5000 under market value. This way the property will usually sell in under a month or so. Again, this all depends on the property location and the economy for the area you’re currently in.
Are you planning to flip the property back on the market or hold and rent for a long term passive income? If you plan to hold and rent the property out, you will need to perform a rent survey of the area to see if the rent will exceed your mortgage payment. A rule of thumb I use, if the rent you can collect is at least $100 to $150 over your monthly debt service or mortgage, you are breaking even. So don’t spend that money. Most homes will require from time-to-time at least $1200 to $3500 in expenses during the year. Let’s say the furnace or water heater dies, those can be your largest expenses when it comes to home ownership. It’s always a good idea to run a rent survey even if you are just flipping the property, just in case you have an issue selling, you will have more options down the road.
You’re buying and selling or closing costs will consist of taxes, insurance, appraisals, title fees, and insurance, real estate agent commissions, attorney fees, wire fees, tax pro-ration, and much more. Remember, if you are flipping a property, you will be paying these fees twice! It will be once when you buy and once again when you find your end buyer. You must figure these fees in at the beginning to know where your profit margin will be at the end of the deal. In Wyoming the closing fees on a typical $100,000 home would be around 6% of the after repair value of the home.
How long will it take to turn the house around, which means how long to fix it up and close on the property or get it rented out? This will be your holding costs. Most single family homes should take no more than 3 months to fix and sell to an end owner, unless you run into a major repair that might take you longer. On average, I’ll figure in 6 months hold time just as a safety net. Remember, your hold time is based on what the current payment is per month for that 6 month period. Calculate this amount in the deal from the beginning.
Something as simple as closing and holding costs, I’ve seen more investors forget these important things, you have to close twice – once as buyer and once as a seller, and then on top of that, you have a payment each month while you are trying to get all your fix up done. The longer you have to hold a property, the less profit you will make in the end. And if the sell doesn’t work out, you can always rent the property and cut your losses. It’s always nice to do your rent surveys before going into a deal, just in case you can’t sell fast at the end. This way you always have other options, options are nice to have. You can sell fast year around, if you have your price set correctly. Most of the time, the winter is a slower time for buyers, sellers, and renters, just keep that in mind. When you go into a deal, and the hold time puts you in December, you might have a hard time selling. Most people will avoid moving over the holidays, there’s just too much other stuff going on at the time. So just keep this in mind, your market will slow slightly during the holidays and even the winter months themselves.
In the next article I’ll cover what we went through in the last three articles. I’ll put it all together into a simple formula that will work with most single family home investments. I will also discuss your profit margin in the investment.
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