While owning an investment property can be a rewarding way to build income and capital growth, it’s important to be prepared for the expenses that come with it. Beyond the initial costs like conveyancing and building inspections, there are ongoing expenses to consider. Here’s a breakdown of some unexpected costs you might face as a property investor and tips on how to prepare for them.
Rising Mortgage Repayments
Interest rate fluctuations can have a big impact on your mortgage repayments. Even if you purchase when rates are low, it's smart to plan for potential increases. Banks typically assess your borrowing capacity with a 3% buffer, so calculate your repayments not just at current rates, but at rates 3% higher. This will help you gauge affordability in the future.
If you’re concerned about covering repayments, properties with a higher rental yield might be a good option as they can help offset mortgage costs. On the other hand, if you have more disposable income, you could focus on properties with strong capital growth potential, even if they have lower yields. The right choice depends on your personal financial situation, so seeking tailored advice is recommended.
Maintenance and Repairs
All properties, regardless of age, will need regular upkeep. Setting aside a buffer for unexpected maintenance and repairs can reduce stress and ensure routine jobs get handled promptly. A common rule of thumb is the 50% rule, where you allocate 50% of your rental income to cover operating costs like property management fees, insurance, taxes, and maintenance. This helps keep your property in good condition while managing your cash flow.
Insurance Costs
Landlord insurance is crucial for covering risks like property damage or tenants defaulting on rent. Additionally, it’s wise to consider income protection or life insurance to safeguard your ability to pay the mortgage if you're unable to work. A financial adviser can help you determine the right coverage for your situation.
Strata Fees
If your investment property is part of a complex, such as an apartment or townhouse, you’ll be responsible for paying strata fees. These fees cover the maintenance of shared spaces like lifts, pools, gardens, and other communal facilities. Keep in mind, the more amenities your building offers, the higher your strata fees will be.
Property Management Fees
A good property manager can relieve you of the day-to-day responsibilities of managing your investment. They should be experts in the local market, ensuring your property is well-maintained, compliant, and occupied by quality tenants. The level of service you receive depends on what you’re willing to invest, but considering property management fees are tax-deductible, it’s often worth paying for a high level of service.
Preparing for the Unexpected
Owning an investment property comes with its share of expenses, but with proper planning, you can set aside enough funds to cover any unexpected costs. It's also important to have the right insurance to protect both your property and personal finances. For tailored advice, consult with a financial adviser to ensure your investment strategy is well-rounded and secure.
*Note: This article is for general informational purposes only and does not constitute financial or legal advice. Always seek advice from qualified professionals before making decisions.*