It may not seem it but finding and buying an investment property is the easy part. Investment properties can pay dividends in the long run, but there are many costs and potential pitfalls investors may not be aware of at the time of buying.
Costs to be aware of
Most of the upfront costs are the same as when buying an owner occupied property, however there are a few extra costs that investors should allow for. These additional costs can become a burden on your finances:
Loan repayments: due to the Australian Prudential Regulation Authority review of investor finance, you’ll find that most if not all lender’s interest rates are around 0.5% higher than owner occupied rates.
Property management fees: if you decide to use a property management agent to find and manage your tenants, you will pay an upfront fee (about one week’s rent) to market your property along with an ongoing percentage of the rent – typically around eight per cent.
Tax on rental income: if your property is positively geared, you will be taxed on the profit you receive from the investment.
Landlord insurance: similar to your building’s insurance on your owner occupied property, landlord insurance covers your building along with cover against public liability. You may also add insurance against loss of rent and cover to evict your tenants, if they break tenancy rules.
Capital Gains Tax: becomes payable if you make a profit at the sale of the investment property. There are certain exemptions that may be applicable – refer to the ATO website.
Council and water rates: if the property is water metered, the tenants will cover the usage of the water, however the landlord generally covers the service charge. The full council rates are covered by the landlord.
Body Corporate/Strata fees: if the property is a unit, townhouse or part of a complex, body corporate fees are payable. These fees will differ from one building to another and needs to be considered when buying the property.
Potential pitfalls to be aware of
There are also many pitfalls when investing in property that can be quite costly
Bad tenants: having had to evict a non-rent paying tenant myself, I can say this is definitely one of the major pitfalls of owning an investment property. The definition of a bad tenant ranges from when they stop paying rent or upsetting neighbours with anti-social behaviour, to not maintaining the property to a certain standard. Removing bad tenants can be quite costly as it may require a solicitor along with court action.
Maintenance and repairs: these can vary from a leaky tap to more serious repairs which could endanger the tenant. Repairs should be dealt with in a timely manner to avoid further issues. Most tenancy agreements allow tenants to have the right to organise a professional and be reimbursed if the repairs haven’t been arranged in a timely manner.
Financial burden: with all the costs listed above, you may find that your rental income does not cover the costs and require you to put money into the investment monthly. In addition, you need to allow for the times the property is vacant, so you will cover all the mortgage payments and associated costs without any income in return, which can be a financial burden if not accounted for. I would always recommend to keep 6 to 12 months’ rent as a contingency to insure against the property being vacant or loss of rent.
Growth: property investing is a long-term investment and property growth can be slow or even go backwards at time. Allow for this so you don’t get disheartened, and keep focused on it as a long-term strategy.
Investing in property can be very lucrative in the long term, however you need to prepare yourself against issues that may occur. The key things with investing are to do your sums along with making sure you find the right tenants. These two factors will reduce the financial burden on you. For further tips and to help crunching the numbers, get in touch with your local mortgage broker, accountant and local letting agent to discuss your investment opportunities.