There can be more to budgeting an investment property than meets the eye. We explore the pitfalls - and a good alternative.
Investing in real estate can be a shrewd financial move, especially if the property’s projected rental income is greater than the mortgage repayments.
If you’re thinking of going down the investment-property path, you’ve probably already made some back-of-the-envelope calculations and figured out what kind of deposit you’d need to make the numbers add up.
But renting out an investment property is more complicated, financially speaking, than it might initially appear. There are a raft of additional fees and outgoings that can quite easily throw your sums out and, while some of these costs are easy to calculate in advance, others remain frustratingly opaque.
‘Renting out an investment property is an inexact science,’ says Angie Zigomanis, Associate Director of Residential Property at BIS Oxford Economics, one of Australia’s leading economic-research and forecasting firms.
‘The amount you’ll pay for various things is uncertain, and if those uncertainties fall the wrong way, you can find yourself out of pocket.’
Fixing what breaks
Zigomanis singles out repairs and maintenance as the category that most often upends investors’ best-laid plans. According to research by BIS Oxford, the upkeep of a rental house costs an average of $2,661 per year while a rental apartment costs $1,677 per year. But sometimes those figures are a lot higher.
Zigomanis reckons the property’s location can make a big difference. ‘Looking at our data, a lot of places in the north – like Darwin and Townsville – tend to have higher repairs and maintenance costs because you have more humid and wild weather and things degenerate a lot quicker because of that,’ he says.
Fees and charges
Other less obvious costs include a range of supplementary fees and charges levied by the real-estate agents who manage rental properties on behalf of investors.
In addition to the agent’s monthly management fee (typically between 7 per cent and 10 per cent of rental income), investors are liable for an initial letting fee of about $400, ongoing administration fees of up to $10 per month plus ‘make-good’ fees which cover the property’s cosmetic upkeep (for example, external and internal painting) which can run to between $700 and $1,400 per year.
All told, these supplementary fees can add up to several thousand dollars annually.
Zigomanis also points out that, for most investor landlords, rent is not actually guaranteed. If your tenant leaves, there’s the risk that your property might stand empty for a week or longer, depriving you of rental income. BIS Oxford Economics estimates that the average investment property is vacant for 1.4 weeks per year.
Declining rents in major cities also come into play. ‘In Perth and Darwin, for example, median rents on the private market are at least 20 per cent if not 30 per cent down on their peaks,’ says Zigomanis. ‘In Sydney and Melbourne, rents have flattened out, and there’s a risk they’ll start to fall in the next year or two.’ If you have to lower your rent, your carefully calibrated profit could evaporate.
If all of these costs seem overwhelming, another option is to consider purchasing an investment property through Defence Housing Australia, which charges a single, all-inclusive management fee.
‘The DHA management fee basically covers everything apart from capital maintenance,’ DHA’s chief economist and head of sales and portfolio management, Dan Carton, says. ‘Normal everyday investment property repairs and maintenance are entirely covered by the DHA fee.’
The management fee is calculated at 16.5 per cent of annual rental income for houses and 13 per cent for units. ‘Those figures can scare people off because your local real-estate agent will charge 7 per cent to 10 per cent,’ Carton says. ‘But that’s comparing apples and oranges – it’s just not the same thing. Once you walk people through the difference with DHA, they go, ‘Wow, this is really good’.’
Another advantage: DHA will pay weekly rent to investors even if the property stands empty. It also institutes a ‘rental floor’ which means investors never receive less rent than they did when they purchased, even if the market softens.
In fact, a report by BIS Oxford Economics estimates investors can save $3,913 a year investing in a DHA house or $3,269 a year investing in a DHA unit.
Disclaimer: Investment is subject to DHA’s lease terms and conditions of sale. Investors retain some responsibilities and risks, i.e. rent, restoration and market fluctuations. Prospective investors should seek independent advice. See dha.gov.au/lookforward for relevant information. Rent is subject to abatement in limited circumstances. Make-good is subject to the duration of the lease term and the obligations of a body corporate. Rental floor applies to DHA properties leased under DHA’s Lease Edition 6C, which will not cover all DHA properties.