What are all of my leasing expenses?

Being a landlord is a great way to build wealth for your future. Your tenant pays rent, which pays most or all of your mortgage. Meanwhile, you benefit from capital growth when the property rises in price.

Can it really be that simple? Yes and no. Owning an investment property can certainly be simple. If you’re looking for an investment that fits in with an already busy life, it may be ideal.

However, if you’re only comparing the expected rental income against the mortgage repayments, you may get a nasty shock.

As any homeowner will tell you, owning property comes with more expenses than just the mortgage. It’s important to understand what all of your leasing expenses will be before deciding to take the plunge.

Property loan repayments

We know you already know about this one! Unless you bought your investment property in cash, you will have taken out an investment home loan to buy it. The repayments on that loan will be your biggest expense as an investor.

Interest rates are extremely low at the moment, with loans available from as little as 2%. However, if you’re thinking of buying, make sure you’re building in a buffer. Rates will probably rise in the future.

Council rates

Council rates are calculated based on the value of your property, so a more expensive house will also cost you more in rates. They also vary significantly between council areas.

In the ACT, rates are made up of two components: a fixed charge and a valuation charge.

As your property rises in value, the valuation charge component will also go up. For most people, this is a small price to pay for the increase in your overall wealth and asset base, but it’s something to be aware of.

You can calculate your rates here.

Strata rates

If you’re buying an apartment or townhouse, the property will be a strata title property.

Owners of strata title property need to pay strata, or body corporate, fees. These fees cover:

• Maintenance of the common areas
• Building and public liability insurance
• Professional management fees
• A sinking fund, which is effectively a saving account to cover future large repairs and maintenance

The more amenities your strata title investment property enjoys, the higher the fees are likely to be. Pools, gyms, saunas and 24 hour security all cost money to maintain. However, they may also bring in a higher rent.

Monika Minko, Senior Leader of Independent Property Management, cautions people to run the numbers. “Those extra amenities do translate to higher rents, but not a lot higher. So you’d have to decide if that’s worth the extra strata fees.”

Utilities

Utilities comprise electricity, gas, water, and, increasingly, internet connections. It is increasingly common that your tenant will organise and pay for these themselves, although water charges are treated a little differently.

“If you’re leasing out a house,” says Monika, “it’s usual that you, the owner, will pay for the water supply charge. Your tenant pays for water consumption. If you’re leasing out an apartment, the water supply is still paid by you as the owner, and consumption charges are included in your strata levies. So effectively, you’re paying for both.”

Property management fees

Renting out your investment property takes ongoing time and work. In rare cases, landlords who own multiple investment properties may take it on as a paid job themselves. However, if you’re working full time or simply have other commitments on your time, you’ll probably want to hire a professional property manager.

Property managers handle new enquiries, open inspections, collect the rent, conduct regular inspections and field maintenance requests. Good property management helps you get the most from your asset by connecting you with the best tradespeople, proactive maintenance and management advice.

For these services, they charge a management fee. This is typically a percentage of the rent and can vary from as low as 6% to 11% or even higher for all-inclusive options. They will also charge a lump sum (typically around 1.1 - 1.5 x the weekly rent) for a lease renewal fee, with extra charges if you need them to attend ACAT on your behalf.

Insurance

There are two main types of insurance for property investors: landlord insurance and building insurance.

If you’re buying into strata, your strata fees will include building insurance. If not, you’ll need to take that out separately. Building insurance will cover you for accidental damage to the building, from storm damage to an out-of-control car coming through your front wall.

Landlord insurance is applicable no matter what type of property you buy.

“It’s probably the most important piece of advice we give people: get landlord insurance,” says Monika. “While we vet our prospective tenants carefully, things do go wrong. If the rent goes unpaid or there’s damage to the property, it’s easier to make an insurance claim than it is to try and chase a problem tenant for what they owe.”

Repairs and maintenance

Buildings, like humans, aren’t immune to the ravages of time forever. As with any other asset, buildings and the things in them (appliances, flooring, kitchens…) wear out over time and need to be repaired or replaced.

“The better the state of repair, the more we can maximise the asking price,” says Monika. “If you rent out your property when it's freshly painted and with everything in good condition, tenants are likely to respond to that favourably and you can often ask for more rent. Tenants are also required to bring the property back to the condition in which they receive it."

However, some maintenance costs can be passed onto the tenant. Keeping the garden in good order is part of the tenant’s responsibility, for example, but some owners take a different approach.

“We’ve had some circumstances where the owner will organise regular pool maintenance, but then the cost gets absorbed in the weekly rent,” says Monika. “Sometimes, owners really love the garden and are worried that tenants won’t do it justice, so they pay for their own garden maintenance quarterly. It’s really a personal choice if you want to do that.”

Finally, if you’re buying a brand new off-plan apartment, you probably won’t need to do any real repairs for a few years yet. But even that shiny new tapware may spring a leak eventually. If you budget a small amount of money from repairs right from the start, it won’t come as a shock when you do have to replace an appliance or call out a plumber.

If you want more advice on your potential investment, or you’re looking for a property manager to look after your new investment, get in touch!