Top 3 avoidable investment expenses
These expenses can strike at any time and take the best of investors by surprise – but there are ways you can prepare for them.
Blogger: Cate Bakos, director, Cate Bakos Property
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Many investors carefully plan their investment acquisitions and take into account all number of facets, yet we still hear so many cases of expenses down the track which could have been avoided with more careful planning. None of them are necessarily obvious at the time, and even with careful due diligence and thorough contract reviews, these expenses can strike at any time and take the best of investors by surprise.
There are ways to avoid such expenses though, and I’ve penned this blog to shed light on how to spot potential minefields and what to do to mitigate the risks of an expensive bill.
The first expense is not an uncommon one and it relates to strata properties – a ‘special levy’. A levy of any kind in its own right is to impose a tax, fee or fine. The dictionary even cites the word punishment, which is a bit extreme - but a property owner will certainly feel punished if the levy is not the pro-active, collaboratively-decided, let’s-keep-the-maintenance-high style of levy. A special levy is often the product of a major building issue and the need to rectify it. Roof leaks, balcony leaks, asbestos removal, subsidence cracking, timber rot and window replacement… the list goes on. Some are more expensive than others. When the problem is structural, the levy can go into the hundreds of thousands, and pending the number of owners in the block, the cost can be a horrid shock.
While a building report can’t always determine every cost going forward that a buyer should provision for, it can shed light on any obvious issues, including water ingress. Buyers who choose not to engage a building inspector are often taking a risk, and the number of properties I’ve decided not to pursue as a result of a troubled report is numerous. Items such as lifts and pools can spell high future cost and maintenance bills; almost always higher than the maintenance surcharges agreed to when the building was new. Being mindful of the items which are included in the general maintenance schedule is important, as the Owner’s Corporation fees generally increase as a building ages and in the case of higher-rise with lifts, the increases are typically of a much higher magnitude than a boutique older building.
The second upsetting expense which we often see relates to fixed rate break-fees on loan accounts. It’s quite simple to explain – if the buyer chooses to fix their loan (or a portion of it), they need to realise that the bank is ‘buying’ those funds at a set rate and factoring in the term of the fixed loan. If the buyer then has a chance of circumstance or decides to refinance with an alternative lender, the original bank will expect to make the same profit as they calculated when the buyer agreed to the fixed loan in the first place. A bank won’t agree to make a loss if the lending rates have changed in the buyer’s favour since the time of locking in. The lender will charge an ‘economic break cost’ to recoup those losses and in some cases, these fees can go into the several-tens-of-thousands of dollars. Buyers who are considering selling should never entertain a longer term fixed loan, although sadly this expense usually strikes when divorce/separation or the need to sell arises.
The third and final upsetting expense applies to those investors who decide on a ‘flip’ strategy but get it wrong. Flipping involves buying, renovating/improving/developing, and on-selling. Many investors have made serious profits out of this approach, however there are many who either lose money, or break-even but neglect to count their own fruitless hours spent on the project. Flippers need to factor in the following expenses and risks before the assume that the project will be viable;
- Buying well (and not at a premium) – this involves having an acute idea of the market value of the property before they start bidding or negotiating
- Stamp duty costs
- Council planning and associated costs
- Improvement costs (labour and materials – and this includes putting a dollar value on their own time)
- Delays which cause cost to be incurred (could be unreliable trades, bad weather, council delays)
- The lost rent cost
- The lost negative gearing cost
- The marketing and sales costs for the resale
- The capital gains tax they’ll incur after the sale (unless they have improved their PPOR)
- Any negative market fluctuations between buying and selling.
High returns require high risks, so an avid ‘flipper’ needs to ensure they have the cash buffers in place in the event that their project doesn’t go to plan.
There are certainly other expensive nasties in the world of property, but these three come up often and need to be top of mind for any investor.
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