Owning Vacant Properties: What does it really cost?

Do you own vacant real estate? Maybe it’s a house, a building, acreage, or a lot? 

When I travel around working on the properties we are selling, I often see valuable assets sitting vacant. They are not earning the owner any money. Many lack maintenance and are really losing value over time. 

We can turn these assets into cash in a couple of months, no matter the condition. You can then invest the cash into assets that are profitable, pay off some debt, or save for emergencies. 

Following is a story about a personal experience:

I usually do not get involved in the business of other family members; however, I noticed a situation and mentioned it was probably costing them $1000.00 per month to own a vacant property. They claimed it was $800.00 per month, but that number does not include everything. 

Let’s take a few minutes to look a little closer and add up the numbers. 

The property was a residential home that was not going to be occupied by the family again. It required a visit and maintenance every so often. No one had even spoken about selling the property when I mentioned the costs. The $800.00 figure came from paying bills for property taxes, insurance, lawn care, utilities, and replacing a water heater. 

Over a 2-year period, it cost $19,200.00 to own a vacant home. That’s a lot of money for a home that eventually sold for $119,000.

Remember I said that number doesn’t include everything? My family was not considering “What if the home was sold 2 years ago, and the money reinvested in a safe way?” How much more money would they have today? This is called “opportunity cost.” 

There are investments that pay more than a bank savings account and are relatively safe and reliable. I have a small retirement account that is invested at a lower rate of risk due to my age. It averages about 8% per year. I could take more risk and potentially get a higher return, but in our example concerning the vacant home, we are going to use a very conservative return to determine our opportunity cost. 

Here is what happens if they had sold the property and invested the money at only 5% per year: 

The value of the home when sold was $119,000.00. 

$119,000.00 x 5% = $5,950.00 (one year’s interest)
$119,000.00 + $5,950.00 = $124,950.00 (principle plus first-year interest earned)
$124,950.00 x 5% = $6,247.50 (second year’s interest)

Over 2 years, they could have earned $12,197.50 in interest on the principle alone.

If we add what it cost in expenses ($19,200.00) plus what they could have earned in interest ($12,197.50), then we start to get a picture of what it really cost them to own the home for 2 years—$31,397.50, which is more than 1/4 of the value of the home.

They could have invested the expense money they were saving ($800.00 per month) at 5% interest to earn even more.

It turns out we were both wrong about how much it was costing per month to own the home. It was actually costing over $1300.00 per month to own a vacant property that no one was using or getting any benefit from.

$31,397.50 / 24 months = $1,308.22

That’s a lot of money. Imagine if the money had been invested at an 8% or even 12% return! 

Now it’s important to note that not all vacant properties will have the same expenses, as some owners do not maintain their properties regularly. However, if properties are not maintained, then the sales prices would be lower, and the losses could be much more. Other properties, like vacant land, can have lower expenses too.

There are other costs to consider as well, like closing costs and sales commissions. Who pays these expenses can affect positively or negatively your net dollars. We also did not include income taxes, whether taxes would be paid on a gain or if the property was held in an IRA.

Each situation is different. We are here to help you analyze and make the right decision for your situation.

Are you our next seller? If you are not using your property, call us today for an evaluation. We can convert your property to cash you can use in as little as 60 days.