18 JUNE 2021
When the market is hot, it is not uncommon for people to start thinking about buying an investment property. If you've got the cash or the bank is willing to lend it to you, why wouldn't you? Prices will double in 7-10 years, right? The tenant will pay for your mortgage - what could go wrong?
Unfortunately, things can and do go wrong. Our role is to guide people wherever we can. We're not trying to discourage your dreams of building a property empire, but we thought we'd share some of our experiences along the way.
The key to making money out of an investment property is to treat it like a business.
One of the biggest reasons businesses break down is a failure to understand the costs. The good news is real estate costs are pretty easy to calculate, but that doesn't mean that people do the homework they should.
For example, let's assume you are looking at a 2-bedroom cottage in Broadmeadow worth around $800,000. This makes for a good location, close to transport, shops and easy access into the CBD.
Hypothetically, let's say you borrow 90% of the loan value at 3% (over a 30-year loan), then you could expect to pay $701 per week in loan repayments.
You do your research and figure it will rent out for $600 per week. We'd advise always doing your homework on comparable properties that are currently for rent rather than just listenining to the quote the selling agent gives you.
But how much of that $600 do you actually see? We think a good rule of thumb would be to assume you will get about 70% of this by the end of the year. This is because you will need to factor in expenses such as council and water rates, landlord insurance and agent fees.
Taking 70% of $600 leaves you around $420 a week. Unfortunately, this is not enough to cover the $701/week mortgage, meaning you will need to dip into your savings to keep the property. You will also need to factor in possible strata fees and maintenance costs, which could add up to thousands of dollars a year. The good news is that provided you have an income, many expenses are tax-deductible.
That doesn't mean the Government will give you the money back. It just helps to reduce your tax a little (this is called negative gearing). The higher the tax bracket you are in, the bigger refund you will get.
You should also factor in the downtime if the property is vacant between leases. The current rental market is tight at the moment, meaning not enough properties to rent out, but it would be wise to assume it may be vacant for 1-2 weeks a year.
Over time, there will be longer-term costs to consider. For example, the roof may need to be replaced, the house will need to be painted, appliances will break, fixtures and fittings will look tired and need to be updated. This will eat into your 70% even further.
Many landlords also fail to maintain their properties. You need to continue to love and care for the home, whether you are living in it or renting it out. Get termite checks and address the concerns of tenants as soon as problems arise.
Buying an investment property should be a long-term prospect. You need to expect that the rent is unlikely to cover all the costs even with low interest rates. However, this isn't a reason not to invest. You make money in real estate in two ways: rent return and capital growth. If you buy in the right place and at the right time, history has shown that over the long term, prices will go up. Doubling every 7-10 years is not an impossible expectation. However, if you will struggle to cover your weekly expenses with the rent, it may not be an option for you.
You also need to consider how different your life will be in 10 years while you are waiting to hit the jackpot. Kids along the way, early retirement, a possible breakup or death in the family? While these things can't always be predicted, they should still be a consideration.
If you buy an investment property and then need to sell it within a couple of years, the high cost of stamp duty and selling fees can turn a great idea into a financial burden.
PS - If you have an investment property and aren't loving the service you are getting from your current property manager, we'd love to have a chat.
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