Concept

Holding Costs

What it is

Holding costs are everything you pay each month just to keep owning the property. Loan payments, property taxes, insurance, utilities (kept on for the crew), and HOA or miscellaneous fees if they apply. On a typical flip with a hard money loan, that’s roughly 1% of the loan amount per month in interest alone, plus everything else on top.

The 70 percent rule buries holding costs inside the 30% buffer along with closing and profit. That works reasonably well at 6 months with ~12% hard money interest. On a gut job that drags to 12 months, or on a deal that looked cosmetic but wasn’t, the buffer evaporates.

Why it matters

My first flip in Colorado took 550 days. I made about $200K on it, but only because the market rose during the hold. Strip out the market appreciation and the same timeline would have eaten most of the profit. That’s the lesson most new flippers learn the expensive way — they think they made $200K when what actually happened is the market bailed them out.

New flippers model deals on purchase price and sale price. They forget holding costs and wonder where the profit went. I teach the equity gap formula specifically to force holding costs into the math: Max Offer = ARV minus rehab minus holding costs minus closing costs minus minimum profit. Leave any of those out and your “deal” is a daydream.

This is also why a great deal executed slowly beats a good deal executed even slower. Two flippers with identical margin but different timelines end up with different profits. Everything in my system — the phases, sub chunking, the pay schedule tied to milestones — exists to compress time on site because time on site is holding costs.

If the deal only works at your best-case timeline, it isn’t a deal. It’s a bet on not screwing up. Real deals survive a slow closing, an inspection surprise, and one contractor blowing a deadline without going red.

How it shows up

Budget holding costs as a separate line in every pro forma. Assume at least one month longer than your plan, because it will be. On a 6-month project with a $200K hard money loan at 12% interest and 3 points, you’re looking at:

  • Points at closing: $6,000
  • Monthly interest: ~$2,000/month for 6 months = $12,000
  • Insurance, taxes, utilities: another $3,000–$6,000 depending on jurisdiction

That’s roughly $20,000–$24,000 in holding costs before you count anything on either side of the purchase. On a deal that “makes $100K” on the spread, you’re down to $76K–$80K before you’ve even gotten to closing costs or taxes. Take a skinnier deal and do this math and it gets a lot tighter a lot faster.

The practical discipline: if your break-even requires everything going right on schedule, the deal needs more equity on arrival.

70 percent rule, equity gap, phases, hard money, the mirage, equity on arrival