Investment property costs – how much does a rental property cost to run?

Property management

Knowing the costs associated with holding an investment property is pretty crucial, especially if you want to plan your budget and maximise the return on your investment.

So what investment property costs can you expect to be liable for?

Besides the monthly loan payment, there is actually a whole range of costs, including the obvious (repairs and maintenance) to the more obscure (landlord insurance, land tax). This is why it is important you research and itemise all your potential costs before you take the leap.

Read this to find out what costs you need to account for, so you have an accurate overview of all the outgoings associated with your investment property.

Fees associated with your loan

There are more costs associated with your loan than simply servicing the monthly repayments. As well as the interest rate, you are also liable for mortgage insurance, an establishment fee, and an annual admin fee. There are also fees if you pay off your loan early or if you switch to another loan provider. You will also have bank charges associated with managing your account, which you also need to itemise.

Cost: These vary depending on the loan provider, and may even not exist – so ask before you sign on the dotted line.

Building and landlord insurance

Never say never is the watchword when it comes to insurance, so make sure you are covered, or you could regret it. Home building insurance covers any damage to your property from a major event such as a fire or natural disaster. If you have bought a property in a strata scheme this is covered by your regular levies. As a landlord you also should take out the aptly named landlord insurance, for cover against damage to your property by your tenants, or if they decide to skip on their rent payments.

Cost: According to CANSTAR, the cost of landlord insurance can range from $419.25 for a unit (Sydney) to $1,160 for a house (Sydney). Home building insurance can range from $963 (NSW) to $623 (Vic).

Property management fees

If you are a first time investor chances are you are considering managing the property yourself. This is an entirely logical approach to take, as you are looking to cut costs wherever possible. Before you make the call take the time to think through how much you know about the legal obligations of being a landlord, and if you have the time to dedicate to it.

Property manager fees may seem like they are gouging your profit margin, but the reality is that they are likely to make your life a lot easier. Not only do they have the industry know-how and time to find and manage tenants, but their fees are also tax deductible – so there is more than one silver lining to their service. You are also quite welcome to switch property managers if you aren’t happy.

Cost: The industry average for property management fees are 7.6%, but can vary from 4% to 12% depending on where you live. Leasi has a competitive all-inclusive management fee of 5% + GST, ensuring you get maximum ROI, with no long-term commitment for using our service. Generally speaking the lower the commission fee charged the fewer services are included, but you should always clarify before you hire any property manager.

Local council rates and land tax

Every local council collects rates, which is another word for a tax, to cover the services they provide, including collecting your rubbish every week. As the landlord you, not the tenant, is responsible for this cost. Land tax is a levy administered by state/territory governments, and is based on the unimproved value of your land – hence the name.

Cost: These costs both vary depending where you live.

Tax and your investment property

If you have a positive cash flow rental property you will be liable to pay income tax on the rent your receive. According to the Australian Tax Office (ATO), ‘if you make a net profit from renting your property, you may need to make pay as you go (PAYG) instalments towards your expected tax liability’. If you sell your property you are also liable to pay capital gains tax (CGT), on the profit you make.

You can claim many deductions to maximise your tax obligations. These can be claimed as income tax deductions, but they must all relate to your rental property. Some typical claimable expenses include repair and maintenance costs, the interest on your loan, advertising costs, property manager fees, body corporate fees and more.

Cost: How much tax you pay will depend on the rental income you receive or the amount you sell your property for – and if this is a capital gain. CGT is typically the same rate as your income tax bracket, but if you have owned the property for more than a year, you get a 50 percent discount on any capital gain.

Renovations, repairs and maintenance to investment property

Like any home your rental property is going to need some TLC in the form of renovations, repairs and ongoing maintenance. As a landlord you are legally obliged to keep the property in good repair.

If you have just bought a property you may want to renovate some areas to make it more appealing to tenants. If you are serious about maximising the return on your investment property you need to be very disciplined with the renovations you carry out.

Large, structural projects are going to dig a hole in your profits, so look to cosmetic projects for maximum bang for your buck. Some cost effective projects to consider include painting, revamping your garden and refreshing your facade.

In terms of rooms to concentrate on, a modern kitchen and well appointed bathroom are sure fire draw cards, but be careful not to overcapitalise. In terms of ongoing maintenance and repairs, the cost of these will depend on the age of your building and how well your tenants look after your property.

Cost: Look to spend less than $10k for a cosmetic renovation. Otherwise preventative maintenance is the way to go for everything else. If you keep on top of this you are unlikely to be slugged with a hefty repair bill down the track, say for a leaking roof.

If your investment property is empty…

Last but not least, and often overlooked – you are liable to cover the cost of your home loan if your property is not tenanted. You alone are liable for the monthly repayments on your home loan, so make allowance for this in your annual budget.

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