How much does it cost to hold a rental investment property?

Once you’ve paid the deposit for your investment property and budgeted for the mortgage repayments, you may think the hard work is over – but there are also multiple ongoing costs associated with property investment that you need to understand.

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Investment properties cost a significant amount of money to keep and maintain – and these expenses will fluctuate over the life of the property.

The difference between an investment succeeding or failing can depend on an investor’s ability to anticipate costs and develop a solid strategy for dealing with them over a long-term basis.

Recurring rates, fees and maintenance costs can be the difference between a positively and negatively-geared property, depending on how much rental income a property generates.

Keeping on top of these costs by factoring them into your calculations can also reduce any personal stress relating to your portfolio.

What are the true holding costs of an investment property?
Beyond the initial costs of establishing an investment, the most common costs associated with holding an investment property are:

Loan repayments: The cost of servicing the loan taken out on an investment property will vary, depending on the amount borrowed, loan term, loan type and any associated loan servicing fees.

Council rates and land tax: Paid on an annual basis, these rates vary by local government area.

Water rates: Whether or not a property investor will be liable for the water costs of their investment property depends on whether that property has provisions for the separate metering of utilities. Many older apartments will not have separate metering of water, meaning that the owner will typically be liable for water rates.

Insurance: In addition to building insurance, many property investors choose to take out landlord insurance in order to limit the financial impact of unforeseen repair costs and tenant-related liabilities.

Body corporate fees: Paid quarterly, body corporate fees are intended to assist in the upkeep of apartment and townhouse complexes. Detached houses will not incur these costs.

Repairs and maintenance costs: The most difficult aspect of property ownership to anticipate and control are those costs related to maintenance and repairs. These costs can arise at any time, and can vary greatly depending upon the nature of the repair and the age of the building, and any insurance policies in place.

Property management fees: If you go through an agency, you will need to take into account listing fees each time your property is re-let, as well as ongoing agency fees taken as a proportion of the monthly rent.

Tax on rental income: If your property is working as an investment then it should be providing income in the form of rental payments. These rental payments, along with any reimbursements associated with outgoings, are subject to taxation and must be declared on an investor’s tax return.

Below are some examples of these expenses, although an individual investor’s holding cost calculations will vary by property type and location.

Council rates $1,662 per annum (Victoria, 2013, MAV)
Land tax

$100 plus 1.6% of the value of land from $432,000 up to $2,641,000

$35,444 for the first $2,641,000 then 2% on additional value

Figures for NSW, 2015

Landlords insurance $1,423.80 per annum (Canstar)
Building insurance $922 per annum (national, 2013, Canstar )
Body corporate fees $1,000 - $10,000+ per annum
Property management fees 7.7% - 8.8% on rent collected
New letting fee One week’s rent plus GST
Advertising $150

Is there a way to minimise the costs associated with holding an investment property?
Some property investors decide to self-manage their properties in order to eliminate the fees associated with paying for a professional property management service.

If you decide to self-manage, you will need to reserve funds for advertising the property each time it is vacated. You will also need to account for any lost income from your normal line of employment incurred as a result of managing issues with your property/tenants.

Other ways you can minimise and manage the costs associated with holding your investment property include: keeping on top of any maintenance requirements (before they become larger and more expensive), regularly reassessing your repayment terms on any loans and reviewing a property’s rental price to ensure it is in line with any market movements.

If the costs of holding your property exceed the amount of income it generates, claiming negative gearing tax benefits will go some way to offsetting this loss. Negative gearing allows you to offset your property investment losses against your income, thereby reducing the amount of tax you owe.

Common tax deductions include:

Costs of owning the property:
• Body corporate fees
• Borrowing and mortgage-related expenses
• Capital works costs (associated with construction costs on the investment)
• Depreciation on assets within the property (eg. in-built electrical appliances)
• Interest on loan relating to property
• Insurance costs
• Pest control
• Depreciation report costs
• Council rates
• Land tax
• Repairs to property (once initial occupation has commenced)
• Travel-related expenses when accessing the property for repairs and inspection

Costs of tenanting:
• Advertising fees
• Cleaning costs
• Agent commission and management fees
• Electricity and gas costs when property unoccupied
• Gardening costs
• Letting fees
• Legal fees associated with tenant dispute resolution
• Landlord insurance

Costs of administering investment:
• Accountant fees
• Postage costs
• Stationary costs
• Bookkeeping fees
• Bank charges

Maintaining an up-to-date budget will assist in spreading holding costs out across a period of time that aligns with the income being generated by you and your property.

Your ownership costs will also vary according to the structure you keep your investment in. Different property investment structures involve different fees and tax liabilities. For example, holding a property in a trust or through a self-managed super fund will incur different costs and deductions to holding a property in your own name. The suitability of these different investment strategies should be discussed with a finance professional.

More information on the costs associated with holding an investment property can be found on ASIC’s MoneySmart website. Investors should seek independent financial advice that incorporates their personal financial circumstances prior to purchasing a property.

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