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What are the holding costs of an investment property?

Wednesday, 5th Apr 2017

What are the holding costs of an investment property?

When it comes to property investing, most of the focus is put on the cost to buy the asset. However, there are also ongoing expenses that investors need to be aware of.

If you can’t meet these ongoing costs, then you’ll likely be forced to sell the investment property and end up in a worse situation than when you started. Therefore, it’s essential to know that you can afford the associated holding costs.

But what are some of the typical holding costs of an investment property?

  • Property management fees. A good professional property management firm will proactively manage your portfolio and deal with any issues that may arise. The cost and level of service will differ between companies so it’s important to complete research and find a company that provides add-value recommendations and annual reviews to optimise your properties’ returns. While this is a holding cost, it’s important to note that property management fees are tax deductible.
  • Strata fees. Apartments, villas and townhouses will often require investors to pay strata fees, which are the responsibility of the landlord, not the tenant. These fees are used to maintain common areas of the property (i.e. lifts, gymnasiums or garden maintenance). The more additional features there are within a complex, the higher the strata fees will generally be.
  • Maintenance costs. It’s advised to set aside some buffer funds for annual maintenance jobs, particularly if your investment property is an older house, but could also be required for a villa or townhouse. The buffer funds can be used for any unexpected costs such as replacing rusting gutters, the lopping of overgrown trees or to lay new carpet or for a fresh coat of paint.
  • Mortgage repayments. Mortgage repayments are generally the biggest holding cost for an investor. However, it doesn’t have to be a drain on your hip pocket. For example, for investors on tighter budgets it would be better to target properties with higher rental yields to help cover more of the mortgage. On the other hand, investors with bigger budgets don’t have to be as concerned with finding a property with high rental yields. As a general rule of thumb, properties with higher rental yields will record lower capital growth, and vice versa. Therefore, investors also need to consider why they’re buying an investment property – for rental income or for capital growth?
  • Insurance. There are a number of different insurances that investors can buy to help protect themselves, their assets and to minimise risk. These include income protection insurance, landlord protection insurance and life insurance, among others. In the event that you fall ill, lose your job or your property is damaged, these types of insurances will help cover financial loss and keep your investment journey on track.

By factoring in the associated holding costs of an investment property, you’ll minimise the risk of financial difficulties in the future after acquiring your property.