Speculators and real estate investors who purchase property with the primary goal of reselling for profit must be especially concerned with the project’s carrying costs. Carrying costs refer to the net amount of expenditures that investors must outlay before the property is resold and profits are realized. The carrying cost usually excludes the purchase price and deducts operating income.
Unfortunately, uninformed real estate investors often look at just the purchase and resell prices. On the surface, buying a property for $100,000 and reselling it for $150,000 would seem like a no-brainer. This transaction, however, would be a disastrous decision if the carrying costs came to $60,000. Savvy investors know that the purchase price is only part of the total expenses required by a real estate investment. Carrying costs include the operating expenses, as well as the acquisition costs, mortgage payments, capital improvements and selling costs.
For example, you may be looking to buy a seemingly undervalued house for $100,000 and resell it within six months for $120,000. That would seem like a reasonable investment for a $20,000 profit.

Rule of thumb for quick buy-resale. In most cases, you must resell your property for a new price at least 11% more than your purchase price just to break even. Think about it! When you bought it, you probably had the typical total closing costs of about 3% of the purchase price. When you resell it, you can usually expect about 1.5% to 2% closing costs. On top of that, average commissions to real estate brokers will be about 5.5%. This doesn’t include the cost of your time or the lost interest income you would have been earning off the money you took out of your savings to make the down payment for the purchase. This rule of thumb also assumes that you sell it right away. Every day you have to wait to re-sell the property mean additional costs!
Understanding carrying costs is often the difference between success and failure as a real estate investor, particularly for speculators. Actually, a savvy investor may still be able to make the above project work by successfully eliminating some of the expenses and/or increasing income. For example, the investor may decide to rent out the garage for storage and the house to seasonal renters for additional income of $5,000 over six months. That would make it a more profitable endeavor. But be careful nevertheless.