You buy into a residential investment property because you want to earn some extra income and get some tax benefits along the way. It's not a bad choice if you have the money available to get started, there is certainly cash flow available, especially when the rental market is in your favour. One thing many new investors don't take into account is the costs involved in setting up and maintaining your rental property.
To keep you in the know, we've pulled together a list of the items you need to purchase and the costs you need to absorb to make sure your investment works as a business.
And it is a business, a landlord is a business owner so it's important to get your head in the business game from the start so you can have the required cash flow to cover yourself from the initial shortfall and any incidents that may pop up during your ownership.
Straight off the bat, you need to consider the costs of the mortgage, loan interest and all the paperwork expenses. These you most likely have crunched the numbers on and know what you are in for so that you can recover his sum in your monthly income.
Here are the hidden costs you need to be aware of...
1. Landlord insurance
Your tenant will pay a bond before moving in but that won't cover any real damage to the property or rent in arrears. It's more of a deterrent for them than a financial cover for you. Landlord insurance will be able to provide more accurate cover for loss or damage to property or contents as well as a loss of income.
2. Repairs and maintenance
Problems are bound to pop up during your ownership that is more costly than your initial wear-and-tear budget. Hot water service replacement, a new gas heater, plumbing issues, leaks or electrical faults all hurt your wallet and may have added service fees if they require a call out after hours or on a public holiday. As part of your legal requirements, you will also need to have annual or bi-annual smoke detector checks and maintenance to be sure you are compliant with fire safety laws.
3. Body corporate or owner's corporation levies
A new carport is being built, the roof needs replacing, the balconies are getting repainted or a sprinkler system is being installed, if your investment is part of a body corporate you'll need to pay a share in these costs, even if you don't approve of them or benefit from them directly. As well as planned works there are also emergencies like burst pipes or cracked cement that can be costly and sudden.
4. Advertising for a tenant
t's not just the marketing costs that go into securing a tenant you need to consider, it's also the time it takes to look over their application and get them signed in. You want your tenants to be properly screened so your supporting agent will require payment for their time, as well as ongoing fees for their representation if you choose to have a middle party take on the customer service side. It takes a lot of stress out of the equation if your tenants can contact an estate agent rather than yourself for information and help. As well as this service you'll need to have the power and water running so that potential tenants can be shown through, no matter how long it takes to secure someone.
5. Property owner rates
Council rates and water rates can pack a heavy punch depending on your property location and tenant water usage. If your property is part of a bigger facility there are additional costs there as well. Aside from the base levy for owner's corporation, you may also have regular payments for maintenance funds, which can be high if your property has luxurious extras like communal laundry, elevators, pools and entertainment areas, security and car parking.
As with any kind of property investment, the answer isn't to avoid at all costs, it's going in with your eyes wide open, leave your emotions at the door and do some serious number crunching before you jump in.