The expenses of owning an investment property.
Whether you are an experienced property investor or in the early stages of considering property investment, your decision-making process will ultimately be influenced by what you can afford. Having a deposit ready in the form of liquid assets or equity, although important, is only the first expense on your property investment journey.
The largest expense for most investors will be your investor loan repayments. Investors usually pay off their home loans fortnightly or monthly. The cost will depend on the type of loan, loan size, interest rate, and length of the loan. When applying for an investor loan, lenders will look at your ability to service a loan (ie. can you afford it).
Current interest rates for many investor home loan products range between 2-3% per annum.
There are two main home loan types, principal and interest, and interest only. A home loan repayment consists of two parts - what you borrow (the principal), and the interest the lender charges.
Interest-only home loans mean minimum repayments will only pay the interest charges on the loan for a set period of time while the principal stays the same.
For example, an interest-only loan of 500k with a 3% interest would be 15k per annum (500 x 0.03 = 15,000). 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 add this expense to ensure the accuracy of your total expenditure per annum.
A traditional principal and interest loan of 500k would cost 15k per year in interest, as well as fortnightly or monthly repayments to reduce the principal.
If you are unsuccessful in your offer, the agent might counter offer your proposal in order for you to meet the vendor’s expectations. This then commences the negotiation phase of a purchase. it is up to the investor to determine if they are willing to negotiate on the purchase price or conditions of their offer. This can be a huge stumbling block for many if they don’t understand how to negotiate effectively.
The negotiations when buying an investment property can take place before and after an offer has been accepted. Both of which can be used by an investor in order to get the best deal they can on a property. It is important to build strong negotiation skills when purchasing a property in order to obtain the best outcome for you as the buyer. The price point is usually the biggest disagreement between a buyer and seller. The seller wants the highest price possible while the buyer wants the cheapest price possible. Therefore, they must find a middle ground in order for an offer to be accepted.
In order to successfully negotiate an offer, a buyer needs to meet the needs of the seller but still make an offer they are comfortable with. Understanding the vendor’s intentions can improve negotiating power. If an investor knows why the vendor is selling, they can use this to their advantage. The vendor may be looking for a quick sale, this may mean the investor has room to negotiate. Alternatively, if the vendor is happy to wait for the best offer it means the investor may need to meet the vendor’s demands to reach an agreement. Knowing the seller’s intention of selling is critical in being able to negotiate a deal.
Council rates are charged to property owners by their local government area (LGA). According to the state government, council rates are 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 house worth 500K. Though this number could vary drastically for those with unique circumstances.
Most investors choose to use a property manager on their properties. The benefits of a great property manager cannot be understated. Most property managers charge their clients around 7-10% of the rental income to manage their properties. This varies based on the agency, location, state, and so on. Many agencies also charge additional fees such as admin fees and advertisement fees.
It's important to know exactly what these fees are before engaging an agency, so you aren’t hit with any surprises 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.
All properties 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 a good idea. A buffer of $500-1000 should be sufficient to cover all low-level maintenance costs over the course of a year.
There are multiple expenses associated with owning an investment property. Understanding the cost of each will likely provide greater clarity around your cash position on an investment and better allow for you to plan for upcoming costs.