ShmoopTube

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Finance a la shmoop what are carrying charges? all right you're a luxury home

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real estate developer you built this awesome house with the entry waterslide [Person riding a waterslide]

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the underground Batcave style freeway connection and of course the chopper pad [Man stood on a chopper pad]

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on top it costs you four million bucks to build okay you built it in like

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Guatemala or somewhere you took out three million bucks in loans at 10%

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interest to do so and if you sold the home for five million dollars well,

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you'd make bank unfortunately some brainless realtor who is actually a [Realtor with green face appears]

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genius at working your ego convinced you to list the home at 8.888

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million he said uh it would be a lucky number really trust me yeah

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it was a high number you'd been hoping to sell for more like a little more than

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half that number but at eight mil in change you would be a financial genius

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hugely profitable and a baller of real estate so you list the home in a huge [Man sitting while covered in cash]

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bull market strong economy people come to the open house which proffer sushi

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and caviar and you know XY and Z and well they laugh the price is crazy high

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unfortunately by the time you fire the realtor a year later the market has gone [Realtor falls to the floor outside house]

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completely into the crapper so you re-list the home at seven million

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crickets and then six more crickets and then

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finally three years later you sell it for five million bucks like right about

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where you wanted to sell in the beginning so everything would have been

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great except for your carrying charges you owed 300 grand a year to rent that

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three million bucks you borrowed to build the home in the first place so

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that's nine hundred thousand dollars just to rent the money for those three [Interest on 3 million bucks highlighted]

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extra years on top of the four million bucks you spent to build the place then

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you had real estate tax heat water maintenance gardener and like 18 other

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carrying costs that go with just maintaining a house in shipshape to you

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know be sold well all in those carrying costs beyond just the rent of

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the money were another six hundred thousand bucks

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so the home cost four million to build but then carrying costs for another

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million and a half dollars leaving your all-in cost to build it at five and a

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half million and you sold at five all that time and work for well nothing

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other than a tax loss of five hundred thousand dollars well guess what

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carrying costs worked this way albeit less dramatically in corporate land as [Man discussing carrying costs]

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well and the most common carrying cost charge is inventory like when Ford has

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gone ahead and built a thousand four cylinder you know cars featuring [Car with one wheel appears]

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best-in-class one wheel drive which doesn't exactly

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fly off the shelves or even drive off of them those thousand cars cost them some

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thirty million bucks to build and they pay seven percent interest on the money

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they borrowed to you know build them and that's 2.1 million dollars a year just

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to rent the money to have a whole lot of inventory sitting there

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well those cars are a low margin business to begin with like maybe 15

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percent operating margins so on thirty million bucks of revenue Ford would hope

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to make four and a half million in operating profits so if they carry the

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cars for an average of a year before they sell well half of their operating

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profits are chewed up just in the inventory cash carrying cost there so no [Man eating operating profits]

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matter how sweet that water slide entry might sound in theory well you might

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want to just save the cash for a rainy day

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