You should be ready to pay some ongoing costs when buying real estate. Besides paying the price of your property, legal fees, governmental taxes, and broker’s fees, you should be ready to pay carrying costs. These are “operating costs” and may relate to a property pre- or post-operation. A property’s carrying costs can be a major component in deriving the net operating income and impact the capitalized value of the property.
What are Carrying Costs?
Unlike other payments involved in buying a property, carrying costs can be incurred regularly throughout the investment holding period and, accordingly, can have a major impact on the investment returns generated by an asset.
The three main stages of capital requirements in the life cycle of a commercial investment include:
- the purchase amount (equity and debt),
- the ongoing costs necessary to “carry” the property during the ownership period and involves regular cash outlay,
- the third is when the property is sold and there will be significant capital inflows from the proceeds of the sale.
Types of carrying costs
The key types of carrying costs are broadly similar for each type of commercial property:
- repairs and maintenance (“R&M”) include cleaning common areas, changing broken bulbs or light switches, power washing outdoor areas, painting windows, etc.
- capital expenditure (“CAPEX”), which includes larger expenses, albeit on a less frequent basis. Such things may include replacing an air conditioning chiller or a roof or work which enhances the building (in addition to the value add a scope of works.