Do You Calculate Your Holding Costs Before You Buy a Flip?

Question

A lot of investors focus on the purchase price, rehab budget, and ARV, but holding costs can quietly eat into the profit.

Before closing, I think it’s important to account for things like interest, utilities, insurance, taxes, maintenance, and the possibility that the project takes longer than expected.

Financing can give you access to capital, but the numbers still have to make sense. Always do your own due diligence and only leverage what you can realistically afford.

For the experienced flippers: how many months of holding costs do you normally build into your numbers before buying a property?

John Leland · Answer

We include not only all of that and holding costs, but contingencies, disposition (sales), taxes, distribution and IRS costs. It got to be a chore so we developed software to address each area and each purchase and distribution method to determine before any money is spent on buying a property how we will sell it and how much we will end up with.

Victor Ramirez · Answer

Always. A simple rule that works: take your realistic rehab timeline, add the time to list and close (usually 2-3 months), then add 2 more months as a buffer. So a 3-month rehab gets underwritten as 7-8 months of holding. Monthly holding = loan interest + taxes + insurance + utilities + lawn/snow, and on hard money the interest is usually the biggest piece by far. Then also count the one-time costs people forget: points at purchase, closing costs on both sides, and agent commissions on the sale. A deal that clears 15%+ profit after all of that is real. If it only works on a 4-month timeline, it's a gamble.

Erik Estrada · Answer

On the lending side, having at least 6 months of interest reserves helps a lot.

Deborah Wodell · Answer

Absolutely agree. Holding costs can make a big difference in the actual profit, especially when a project takes longer than expected. I’d rather build in a little extra cushion upfront than have a delay eat into the returns later. For me, I’d generally want to account for at least 3 months of additional holding costs beyond the expected timeline, depending on the project and exit strategy.

Alex Crivelli · Answer

I'd budget your full loan term plus a 2–3 month cushion for interest, taxes, insurance and utilities. As a lender, the thing I see burn people most is extension fees when a flip runs long, so ask any lender what extensions cost before you close. With interest-only payments, holding costs are easy to calculate: loan balance times rate divided by 12.

Bryce Axelrad · Answer

As a lender, I’d also put the loan maturity date right next to that holding-cost budget. An extra two or three months of interest is one thing. Needing an extension during those months is another.

I’d ask what an extension costs, what has to be true to get it, and whether interest is charged on the full rehab allocation or only the funds drawn. Then run the slower-sale scenario using those actual terms. The number of months matters, but so does what happens to your financing during them.

Divin Kanyama · Answer

Great point, @Nicholas Floyd . Holding costs are easy to underestimate because they accumulate quietly while attention stays on the rehab and resale numbers. I would rather underwrite beyond the ideal schedule and be pleasantly surprised than depend on a perfect timeline. A practical approach is to budget for the expected renovation and sale period, then add at least two or three months as a cushion for permit delays, contractor availability, inspections, weather, or a slower closing. The right buffer will vary by project and market, but the deal should still be workable if the timeline slips. If a few extra months of interest, utilities, insurance, taxes, and maintenance eliminate the profit, the margin may be too thin from the start.

Nicholas Floyd · Answer

Victor, that’s an excellent breakdown. I especially agree with underwriting a deal based on a realistic timeline rather than a best-case scenario. Those additional months of holding costs can make a huge difference in profitability.

That’s also why I believe having access to business funding outside of the original project financing can be valuable. Business lines of credit and other funding options can give investors additional flexibility without necessarily tying up all their available cash.

With your underwriting experience, do you find that investors who have access to additional capital are generally better positioned to take on multiple projects at once?

Nicholas Floyd · Answer

Erik, I agree. Having six months of interest reserves can definitely give investors some breathing room when projects take longer than expected. That’s also why I emphasize securing additional business capital before it’s actually needed. Having access to business lines of credit or other funding options can help investors protect their cash reserves. From your experience on the lending side, do you find that most investors come prepared with sufficient reserves, or is that something they tend to overlook?

Nicholas Floyd · Answer

Deborah, I completely agree. Having that extra cushion can make a huge difference between a profitable flip and one where unexpected expenses eat into the returns. I always encourage investors to think about their financing options before they actually need additional capital. Having access to business credit lines or other funding sources can provide some breathing room when projects don’t go exactly as planned. I’m curious, do you typically prefer keeping additional cash reserves available, or do you also like having access to credit as a backup?

Do You Calculate Your Holding Costs Before You Buy a Flip?

Do You Calculate Your Holding Costs Before You Buy a Flip?

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