Glossary
Carry Cost (Cost of Carry)
Carry cost, or cost of carry, is the total expense of holding an asset over a period, including financing interest, property taxes, insurance, storage, maintenance and opportunity cost, less any income the asset produces. Underwriters estimate it for land, development, inventory and value-add investments that earn little income while being held.
Formula
Example
A developer buys land for $5,000,000, financing 60% ($3,000,000) at 8%, or $240,000 of annual interest. Property taxes are $60,000 and insurance is $10,000, and the land produces no income. Annual carry cost is $310,000. If entitlements take two years, total carry is $620,000, or 12.4% of the purchase price, before any construction begins.
How it is used in underwriting
Carry costs determine whether a holding strategy makes economic sense. In land and development deals, underwriters budget interest reserves and holding costs for the entitlement and construction period, and include them in total project cost for loan to cost calculations. In value-add real estate, vacancy during renovation creates negative carry that must be funded. In lending against inventory or royalties, carry costs reduce net recovery if collateral must be held before sale. Delays are the main risk: each additional month adds interest, taxes and insurance, and long delays can turn a profitable project into a loss.
Carry cost should not be confused with carried interest, the share of profits a private equity or real estate sponsor earns, which is often shortened to carry. In derivatives and trading, cost of carry refers to the financing and storage costs of holding a position, and positive or negative carry describes whether income exceeds those costs. Underwriters often understate carry by assuming fast approvals, ignoring rate increases on floating debt, or omitting opportunity cost on equity. Sensitivity analysis on timing, varying the holding period by several months, shows how much cushion the project has.
Frequently asked questions
What is included in carry cost?
Carry cost typically includes interest on debt used to buy the asset, property taxes, insurance, maintenance, security, utilities, storage and management, minus any income the asset generates. Some analysts also include the opportunity cost of equity, the return that capital could have earned elsewhere.
What is negative carry?
Negative carry occurs when the cost of holding an asset exceeds the income it produces. Land, vacant buildings during renovation and some investments financed at rates above their yield all have negative carry. Investors accept it only when they expect future value or income to more than compensate.
Is carry cost the same as carried interest?
No. Carry cost is the expense of holding an asset. Carried interest is the share of profits paid to a fund manager or sponsor after investors receive their capital and a preferred return. Both are often shortened to carry, so context determines which is meant.
Related terms
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