The 15 Ongoing Costs When Owning An Investment Property (Ep118)
Owning a property comes with a lot of expenses. Things like council rates, insurances and maintenance can catch home buyers or investors off guard if they haven’t planned for these expenses.
A lot of people when looking at investment properties do calculations based on what their expected mortgage expenses are going to be and what the rental income is.
If the rental income is greater than the mortgage, then they assume it’s going to be a positive cash flow property, but that’s not necessarily the case. There are a lot of ongoing costs when you own an investment property and I am going to look at 15 of those ongoing costs in today’s episode.
Go through the list and calculate your ongoing costs to you can manage your cash flow effectively and get the best return on investment for yourself.
What are these ongoing costs when owning an investment property and how much of these costs do you need to take into account to understand whether a property is going to be positively geared or negatively geared?
At the end of the day the more expenses that are going out, the more money you have to make, in order to get the return on investment you want. For help doing these calculations and estimating the cash flow of a property check out our range of investor property tools.
Expense 1: Insurance
The chances are, if you own a property, that you will want to get landlords insurance. Now this insurance will likely cover you for things like flood damage, fires etc.
It is also likely to cover you for the things like malicious damage from the tenants, a lack of rental income from tenants who have damaged the property or failed to pay rent etc. Every different insurer is going to offer a different sort of landlords insurance to make sure you’re clear on what they offer.
When I interviewed Ben Turner from iPropertyInvestor back in episode 102 and 103. He said that because he had invested in rougher areas he had tenants that had set fire in the house. The cost of fixing it and the cost of rent while he couldn’t rent it was all covered by insurance, because he had that landlords insurance. So definitely something that you need to look at.
Expense 2: Interest
This is a very fairly obvious one – if you purchase a property and you get a loan then interest is going to be charged on that loan. Currently interest rate are really low (you’re looking at 5% or less) but traditionally interest rates have been higher than that.
You can opt for an interest only loan (the benefits) or your can look for a principal and interest loan so that eventually your loan is paid off.
Expense 3: Accountant
Unless you can do it yourself, which is not something that I would do, you need an accountant to help you do your tax returns at the end of the year. You need to assess things like depreciation, rental income and expenses. Your accountant will help you work out what you can claim and what you can’t claim.
An accountant will help you put all that together and will help you do your tax return. This is almost always a tax deductible expense.
Expense 4: Council Rates
Depending on the council that you are in, rates may differ but in order to own property you are going to have to pay your council rates to make sure that the council keeps running. These are usually once every quarter.
Expense 5: Bank Fees
A lot of the mortgages out there have annual bank fees that you need to pay or maybe monthly bank fees that you need to pay, so that is going to be an ongoing expense that you need to take into an account. It’s probably not going to be extravagant, it’s probably not going to be super expensive, but it is something they you need to take into account, because $100 here on bank fees and $500 there on council rates, it all starts to add up.
Expense 6: Strata Fees (Body Corporate)
Ongoing expense number six is strata fees or also known as body corporate fees. This exists when you own a unit, or maybe a townhouse in a complex. In these situations you are going to have to pay strata or body corporate, which helps pays for the maintenance of the common areas. Depending on what is actually in the facility will depend on how much your strata costs are going to be.
Properties that have a lot of high maintenance things in them, things like pools which need to be maintained , gyms and gym equipment, saunas etc are going to come with higher strata fees. So when you’re investing in a lovely property, don’t forget to think about this strata expenses that you’re going to have.
Expense 7: Rental Management
Unless you are renting out the property yourself and doing all the managing yourself you are probably going to hire a rental manager to do that for you. They tent to charge anywhere from about 6%-8% as a percentage of the rental income that’s coming in.
Rental managers will also often charge a fee of around 110%-150% of one weeks rent, whenever a tenant moves out and they need to get a new tenant.
Expense 8: Maintenance
Unless you’re buying a brand-new build (and even then you could have the maintenance), chances are that things are going to need to be maintained. You might have broken water heater, you might need a fresh coat of paint, you might need some new carpet, you might get leaky taps, your roof might leak. There are a million things that can go wrong with a property and any of us who have been tenants in a property or who own our own property, you know that there’s always expense keeping a property going.
Some people will put aside a percentage of rental income(maybe 5%) other the people will set a figure each year for the maintenance. But at the end of the day you will likely spend what the property demands, which can be unpredictable.
Expense 9: Water Rates (maybe)
Ongoing expense number nine is water and I’ve said maybe, because things are changing. A lot of tenants are now getting charged for water.
In the last three properties that I was in in New South Wales I had to pay for water and the way that work is that you as an owner would get your water rates sent to you each quarter and basically the cost of your water rates would be passed onto the tenant.
This is organised when you sign a new tenant or when you update the contract. So water rates might be something they have to pay for or you could potentially get the tenants to pay for it as well.
Expense 10: Pest Maintenance
Every now and then you’re probably going to need to get someone to come into the property and to spray the property and just make sure that there is no pest issues with the property.
Expense 11: New Tenant Fees
When a tenant leaves your property and you’ve got a new tenant coming in the real estate agent and your rental manager is probably going to charge you a fee in order to advertise that property. Generally that’s around 110% of one weeks rent but it does vary from realtor to realtor.
If you have a new tenant every six months then you are going to be paying that fee twice a year. If you’ve got tenants every two months then you’ll be paying it six times a year and so it is an expense that you need to take into account.
Expense 12: Renovations
This is when you really want to upgrade the property and want to make it nice and liveable, so you can keep getting the rental returns that you’ve been getting. This may mean a fairly standard cosmetic renovation which isn’t going to cost you a huge amount of money – but it may be a more intense renovation.
It’s not an ongoing cost that you’re probably going to experience every single year but something that you want to do probably every few years or so just to get the property up to its standard, make sure you’re getting the best tenants and the best return on investment.
Expense 13: Tax
We’ve got 2 guarantees in life, there is death and there is taxes. We know that every year when 30 June comes around that we are going to have to do our tax return and we are going to have to pay our taxes.
If you’ve got a positive cash flow property where the property is generating you more rental income then you’re paying in expenses (unless you can depreciate a lot to offset that) chances are you going to have to pay tax.
If you are negatively geared you might actually get a tax refund. It depends on the property but as you own a property longer and longer there’s going to be less to depreciate and rental incomes is going to go up. So therefore eventually you’re going to be making money which you’ll need to pay tax on.
When doing your tax it is important to know what you can and can’t claim. Here are 20 common investment property tax deductions.
Expense 14: Stationary
Ongoing expense number 14 is a random one that you probably never thought of and that’s stationary. Things like printer cartridges, paper, pens all the stuff that you need to buy to manage your paperwork for the investment property that you run.
There is a whole bunch of different things that you may need to do with stationary at home and so there is the potential to claim that as an expense on your property. Even if you choose not to claim it, you are still going to have an expense that you are going to have to pay for, so definitely something to consider.
Expense 15: Travel and Accommodation
And last but not least ongoing expense number 15 is travel and accommodation. If you need to travel and you need to stay somewhere in order to inspect your property then you are going to have to pay for that out of your own pocket and obviously a portion of that or maybe even all of it can be tax deductible. This can be a tricky one – see 5 tax deductions NOT to claim.
If you actually want be one of those people who do inspect their property and not just have the rental managers inspect that, then you need to take into account the cost of travelling to the property and also the cost of staying overnight if you need to.
So there you have it, we conquered it. 15 ongoing costs when owning an investment property! There are other costs that I haven’t put in this list and there are some things that I just couldn’t think of.
So don’t think of this as THE definitive list but it is a good place to start and it’s going to cover most of your major expenses.