Investing in real estate can be a lucrative business, but it’s not without risk. One of the most significant risks is holding the wrong property for too long. Holding costs can quickly add up, eating away at your profits and even causing you to lose money. In this guide, we’ll take a look at holding costs and how they can impact your bottom line. We’ll also provide a holding cost checklist for investors and property flippers in Milwaukee to help you avoid some of the most common pitfalls.
What are Holding Costs?
Holding costs are critical to consider because they directly impact your profitability and can significantly affect your return on investment (ROI). For example, let’s take a Milwaukee investor who purchases a duplex in the East Side neighborhood for $250,000. Their monthly holding costs, including $1,200 in mortgage payments, $300 in utilities, and $200 in property taxes, total $1,700. If unexpected delays in renovation stretch their timeline to six months, the total holding costs reach $10,200—significantly cutting into the projected $30,000 profit and reducing their ROI by 15%.
It’s not just about the direct costs; holding onto a property longer than expected also means missed opportunities. Every additional month you hold a property could mean delaying another lucrative deal or being unprepared to act on a sudden market downturn. By calculating your holding costs accurately upfront and factoring in potential delays, you can ensure your investment remains profitable.
Why are Holding Costs Important?
Holding costs are important because they can significantly impact your profitability. If you hold onto a property for too long, your holding costs can eat away at your profits or even cause you to lose money. For example, if you’re paying $1,000 per month in mortgage payments, property taxes, and utilities, and it takes you six months to sell the property, your holding costs will be $6,000. If you were planning on making a $20,000 profit on the sale, your actual profit will now be reduced to $14,000.
Holding costs can also impact your return on investment (ROI). The longer you hold onto a property, the lower your ROI will be. If you’re planning on flipping a property, for example, you’ll want to sell it as quickly as possible to maximize your ROI. However, if you hold onto the property for too long, your ROI will decrease.
Holding Cost Checklist for Investors and Property Flippers in Milwaukee
To help you avoid some of the most common holding cost pitfalls, we’ve created a detailed holding cost checklist tailored specifically for investors and property flippers in Milwaukee. With factors like property taxes and utility rates varying by neighborhood, it’s critical to incorporate accurate local data into your calculations. For instance, homes in Milwaukee’s Riverwest area might have different tax assessments or insurance requirements compared to those in Wauwatosa. Use this checklist as a practical tool to anticipate and manage costs while navigating Milwaukee’s unique real estate market conditions. By understanding these localized nuances, you’ll position yourself for better profitability and reduced risk.
1. Mortgage payments: If you have a mortgage on the property, be sure to factor in the monthly payments.
2. Property taxes: Property taxes can vary widely depending on the location and value of the property.
3. Insurance: Property insurance can protect you in case of damage or loss, but it comes at a cost.
4. Utilities: Utilities like electricity, water, and gas can add up quickly, especially if the property is vacant.
5. Maintenance and repairs: Properties require ongoing maintenance and occasional repairs. Be sure to factor in the costs of routine maintenance like lawn care, cleaning, and HVAC maintenance, as well as unexpected repairs.
6. Property management fees: If you’re renting out the property, you may need to pay a property management company to handle tenant issues and collect rent.
7. Homeowner association (HOA) fees: If the property is part of an HOA, you’ll need to pay monthly or annual fees.
8. Vacancy costs: If your property in Milwaukee sits vacant, you’ll not only face the burden of ongoing utilities, but also the added challenges of maintaining curb appeal during harsher winters. For example, a vacant property during January in Milwaukee may require additional snow removal services and heating to prevent pipe freezing, adding hundreds of dollars to your monthly holding costs. These seasonal considerations, combined with standard expenses like landscaping, security, and insurance, can escalate quickly if not planned for. By proactively budgeting for these vacancy-specific holding costs, you can avoid unexpected financial setbacks.
9. Opportunity cost: The longer you hold onto a property, the more you’re missing out on other investment opportunities. Be sure to factor in the opportunity cost of holding onto the property.
Holding costs are one of the most critical yet underestimated factors in real estate investment. These costs not only reduce your profit margins but also play a pivotal role in determining your ROI. For Milwaukee investors, these expenses can vary widely depending on the season, neighborhood, and type of property. For instance, properties in areas like Bay View might incur higher homeowner association (HOA) fees, while those in the suburbs could have lower insurance premiums. By utilizing the tailored holding cost checklist in this guide and supplementing it with local knowledge—like Milwaukee’s tax incentives or seasonal maintenance needs—you’ll be equipped to make smarter, more informed decisions that maximize your profitability and mitigate risks. This will help you make more informed investment decisions and maximize your profitability. Do you have questions about buying or selling real estate in Milwaukee? Reach out to our team to find out how we help investors and property flippers! (920) 851-9727