It’s an all-too-common mistake, residential property investors only considering the acquisition cost of a property and failing to look at the holding costs. So what ongoing expenses are involved with property investment?
While the cost of buying a residential investment property is highly important, equally important is understanding the expenses you’ll have to meet once you take ownership of your new investment.
It’s all well and good to buy an investment property that’s within your price range, but if you can’t afford to pay the ongoing expenses then you’ll be forced to sell, and most likely end up with a net loss after you’ve paid stamp duty (for acquisition) and selling agents fees.
So what ongoing expenses do investors in residential property need to be aware of?
Investors need to buy a property that will suit their budgetary requirements. For example, if an investor has a small disposable income, they could target properties with higher rental yields, as this will help cover the mortgage repayments. For investors with larger disposable incomes, though, they don’t necessarily need to target properties with higher rental yields. As a general rule of thumb, properties with higher rental yields will record lower capital growth, and vice versa. Therefore, investors also need to consider why they’re buying an investment property – for rental income or for capital growth?
Investors should have some buffer funds set aside for annual maintenance costs, whether it be for a yearly gutter clean before winter, to repair or replace an ageing fence or for a fresh coat of paint. This is particularly important if your investment property is a house, as houses typically have more maintenance requirements than a new apartment.
Property management fees
The cost of utilising a property manager will vary from company to company, however investors shouldn’t choose a property manager based purely on price. A cheaper property manager probably won’t provide a proactive service to optimise your assets. A good property manager will specialise in investment rentals; provide value add recommendations and complete annual reviews to maximise rents and grow your property portfolio faster. Property management fees are also tax deductible.
It’s important to consider what types of insurance you will need when buying an investment property. Landlord protection insurance, income protection insurance and life insurance are just a few insurance policies that you need to consider as a property investor. Such insurances will help keep your property investment journey on track should you fall ill or if your property is damaged by tenants or natural causes.
Apartments and townhouses will often require investors to pay strata fees. Typically, these are paid by the landlord, not the tenant. The strata fees are used to maintain common areas within the complex, such as lifts, pools and gardens, so the more features within the complex the higher strata fees will typically be.
Investors need to consider these additional costs in their budgets when planning their next acquisition.
While some investors might regard maintenance buffers, insurance and property management as extra cost imposts that they don’t need, by spending a little now, investors can save a lot of money in the long run and avoid unexpected costs.