There are numerous expenses associated with owning an investment property. All these expenses range in their occurrence and price. It is important to know the cost of each of these expenses to ensure you know what you are getting into when purchasing a property. In many cases, the rental income from a property can cover a large proportion of expenditure. However, by knowing the cost of each expense an investor can run a successful cash flow analysis to ensure they understand the holding costs of property ownership.
Loan repayments
The largest expense for most investors is the repayments of the mortgage attached to their property. The cost of this expense ranges depending on the type of loan, loan size, interest rate, and length of the loan. However, it is most likely the biggest expense for an investor. Current interest rates for many individuals are ranging between 2-3% per annum. Therefore, to calculate the cost of this expense will be to simply time the loan amount by the interest rate.
For example, a 500k loan with a 3% interest would be 15k per annum (500 x 0.03 = 15,000). This is assuming the loan type is interest-only (IO). If the loan is principal and interest, it will obviously incur a greater cost per annum. Another thing to note is the fact that most lenders charge additional fees for having a loan. A common additional fee is that of a package fee which is usually around $400 per annum. It is important to know to add this expense to ensure the accuracy of your total expenditure per annum.
Insurance
Another major expense is the insurance policy taken out to protect yourself if anything goes south. Most investors take out two types of policies which are usually offered as a package by many insurance companies. These two policies are: Landlord insurance and Building insurance. Landlord insurance covers most things associated with renting your property to tenants and any issues incurred within the process. For example, many policies offer rental coverage in circumstances where the tenant stops paying the rent? Building insurance covers anything to do with external damages to the dwelling of your property. For example, if there was a natural disaster that damaged your property you would be covered for certain events to fix the outstanding cost of damages to the property.
The cost of taking out these policies again is dependent on the location of a property, rental amount, cost to rebuild and level of cover. For a 500k property renting for $500, a rough cost to both insurance policies would be approximately $1200. However, this varies with companies and the variables listed above. Although this may be a costly expense it is most definitely a worthwhile investment to ensure you are covered if anything does go wrong.
Council rates
Another major expense is that of council rates. Council rates are charged to property owners by their local government area (LGA). According to the state government, the cost of this expense is used towards paying for “community services, sporting, and recreation services, environmental planning, public health, environmental protection and waste collection, treatment, and disposal”. This enables local governments to run smoothly and support the development of their local council. The cost of council rates varies between councils, it also depends on the type, size, and use of your property or land. An estimated cost to rates could vary between $1500-3000 per annum for a standard 500k house. Though this number could vary drastically for those with unique circumstances.
Property management fees
Most investors choose to engage a recitable property manager to manage their investment properties. The benefits of a great property manager cannot be understated. However, this service does not come with a fee. Most property managers charge their clients around 7-10% of the rental income to manage their properties. Again, this varies on PM agency, location, state, and so on. Many agencies also charge additional fees such as admin fees, cost to advertise for tenants, and cost to complete additional activates to manage the property. It is important to know exactly what these are before engaging an agency, so you aren’t hit with any hidden fees down the track. For a property renting at $500 per week, a rough estimate of expense could be around $2,600 per annum from your property manager.
Maintenance cost
Many properties, particularly if they are quite old require upkeep and maintenance. This is an added expense that can be hard to calculate as some things can stop working suddenly without any notice. As an investor, having a maintenance buffer per annum allocated for a property is probably a good idea. As you will likely face maintenance issues down the track. It could be a minor issue or major, so it is important to know the condition of a property before purchasing it. A buffer of $500-1000 should be sufficient to cover all low-level maintenance costs over the course of a year.
The Verdict
There are numerous costs associated with owning an investment property. It is important to know what these costs are and how much they take out of your pocket. In doing so, you can better plan your cash position on a property and complete a successful cash flow analysis. This allows the investors to manage their incomings vs outgoing success without any hidden costs.
