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The cost of investment property - don't be too tight for your own good

Investors need to be discerning when spending money. No one wants to overcapitalise. But some investors cross into the unwise territory of being “penny wise, pound foolish” when they are unwilling to spend money for what are necessary investment property costs.

When buying an investment property the vast majority of landlords realise they’ll need to put money into their investment over time to look after it properly. But there are exceptions. They include:

  • The small percentage of landlords who are so focused on saving a few dollars that they end up costing themselves a lot more in the long run
  • Landlords may not be stingy by nature but genuinely didn’t anticipate the cost of an investment property
  • Investors who experience a tough financial patch and need to cut back on investment property costs where possible

So if you are wondering ‘can I afford an investment property?’ I have come up with a few budget guidelines and property investment tips to assist with any of these scenarios.

First, a quick explanation for those who are new to the cost of investment property.

While rent comes into your bank account regularly, money will also leave your account as you pay all the expenses involved in owning a property. In many cases you’ll have less money coming in than is going out (negative cash flow). You need to make up the shortfall from other income or savings you have.

It’s one thing to budget for likely investment property costs, but a more valuable exercise is to calculate your likely cash flow – which reflects both money in and money out. It’s hard to anticipate with 100% accuracy what your cash flow will be when you are buying an investment property, but you absolutely must make some conservative estimates, or you can come unstuck.

If you can’t cover ongoing investment property costs, you might end up with a bigger bill down the track which is commonly the case when maintenance issues aren’t attended to properly. Or you might be forced to sell your property at an inopportune time and you may end up losing a lot of money on your investment.

When buying an investment property you need to budget for the following holding costs for a residential property investment:

  • Interest/loan repayments
  • Insurance (landlord’s insurance, building insurance, income protection insurance)
  • Council rates
  • Water rates
  • Property management fees (including advertising for tenants and re-letting fees)
  • Body corporate fees (such as strata levies if you own in a strata complex)
  • Cleaning
  • Repairs
  • Lawn and garden
  • Pest control (ongoing inspections and treatments)
  • Legal fees (for example if you have a dispute with a tenant)
  • Accounting fees
  • Quantity surveyor’s report (if you haven’t already done this at the time of purchase)
  • Land tax (where applicable)
  • Tax on rental income (where applicable)
  • Travel to inspect the property
  • Computer and stationery

When calculating your cash flow, speak to your accountant to find out which of these investment property costs will be tax deductible.

Also factor in any depreciation benefits. Also consider lodging a PAYG (pay as you go) Income Tax Withholding Variation form with the Australian Taxation Office (ATO). If you would be entitled to a large tax return in relation to a negatively geared property, you can arrange to receive that refund in instalments through your weekly pay rather than waiting until you lodge your tax return. This makes cash flow throughout the year a bit more manageable. In other words, you’ll have more money at your disposal to pay for your ongoing expenses.

Another important property investment tip is don’t skimp on maintenance. Maintenance has to be attended to, or it tends to cost you more money over time.

Some investment property costs are non-negotiable. Emergencies, safety issues and legislative issues absolutely cannot be ignored. Electrical problems, pool fences, blind cords, smoke alarms and many plumbing issues fall in these categories, to name a few.

Landlords also can’t ignore the upkeep of items which were in working order when the tenant took on the lease. For example, if an air conditioner stops working the landlord can’t ignore it because the rent was reflective of the airconditioner being operable when the lease commenced.

Outlined below are a few other commonly forgotten investment property costs:

  • Accounting fees (which increase when you own an investment property)
  • Strata levies (which might be set at a particular rate when you buy into a new development, but have the potential to increase down the track)
  • Increasing strata levies for buildings with facilities like gyms, pools, saunas and landscaped gardens as they become more expensive to maintain over time
  • An annual pest inspection
  • Land tax (if applicable as it varies between states)
  • Additional property management fees that may be outside of the standard fee
  • Periods of vacancy when no rental income is coming in

The cost of an investment property is not onerous but it is important to do your homework before buying an investment property to make sure you can comfortably cover all investment property costs and accommodate any unexpected surprises. Just remember one of the main property investment tips is ‘don’t be too tight for your own good’ or it will only end up costing you more money in the long run.

Our Property Investment Specialists, will work with our partners at Resolve Finance to devise a property investment strategy for you to ensure you get the right investment property and finance strategy so you don't affect your lifestyle. If you would like to talk more about a property investment strategy, get in touch with our team today.