If you’ve recently bought an investment property, or are thinking of buying an investment property, way to go! An investment property can be a great way to achieve a bit of passive income, grow your equity, and get a bit more financial freedom for you and your family.
Watch instead: I have bought an investment property, how much money do I set aside to manage it?
Alongside the potential advantages listed above, one of the main benefits of purchasing an investment property is capital growth. When you hold onto a property for a number of years, the value of that property increases so when the time comes for you to sell that property you get a good return on investment.
While an investment property is very exciting, they can put you out of pocket if you haven’t budgeted for unforeseen costs and situations in your spending plan. We’re going to go through our top six things to consider when buying a rental property to ensure you have enough money set aside to manage and run it properly from the get-go.
1. Property Management
Property management is a must-have. You have to have this in place for your tenants whether you get a property manager to do it or you do it yourself. If you are planning on doing this yourself, ask yourself how valuable your time is and potentially reconsider as Property Management can be incredibly time-consuming, and not to mention, stressful. You’ll be dealing with complaints, tenant changeovers, damages and much more. Considering that Property Managers only cost about 8% of the rent that you’ll be receiving from your tenants, it’s really worth having one.
Our second consideration is ensuring you’re putting aside money for rates. It depends on where your rental property is situated, but a good round figure is about $2,500 per year.
3. House insurance
Home insurance is also a must-have when it comes to investing in a rental property. You want to be able to protect your property and its surroundings from fire, flooding, and other expensive damage tenants can inflict upon your property. Be sure to look into other types of insurance too such as landlords insurance, which can cover you for loss of rent, and meth contamination, which can cover the cleaning cost if methamphetamine residue is found in your rental. A good figure to budget for home insurance is around $1,500 per year; but your broker will be able to give you a more accurate figure.
4. Vacancy Periods
Another must-have when it comes to your spending plan is ensuring you’ve accounted for vacancy periods i.e. when the property is not currently tenanted. In a perfect world, you would always have a tenant in there, sometimes the unexpected happens and you’re left with a few weeks where the property is vacant. A good rule of thumb is to set aside at least two weeks’ worth of rent each year to cover these vacant periods.
5. Repairs and Maintenance
If you’ve purchased a new build, the great news is your repairs and maintenance costs will be minimal for the first few years. If you’ve purchased an existing property however, you need to do an assessment of what needs to be fixed up, what costs are involved and have a bit of money set aside for unforeseen maintenance and repairs as well. If you have a new build, $1000 per year should be enough to cover repairs and maintenance. If you have an older build, a good rule of thumb is setting aside around 8-10% of the rental yield per year to cover maintenance and repair costs, however, as stated above, we recommend going through the property with a builder and doing an assessment of what needs to be fixed or may need to be fixed down the line.
6. Negative Gearing
When purchasing an investment property, you ultimately want be positively geared (i.e. making a profit) or at least breaking even as soon as possible. If your property is negatively geared when first purchased (i.e. the annual cost of your investment property is more than the return) you need to ensure you have enough money set aside in your spending plan to cover its losses. Ensure you can afford the mortgage repayments, rates, management fees etc. that aren’t covered by the rental income until your investment property starts to make a profit.
So those are the six must haves that you need to consider when you are doing your spending plan for your investment property in order to properly manage it and make sure that your cash flow is affordable.
If you would like some help setting up your spending plan for your investment property or want to talk numbers on a potential investment property, book in now for a 15-minute chat. We’ll be able to sit down and discuss your equity position, look at your current mortgages, and make sure everything is set up in a way that works best for your financial goals and cash flow.
Keep in mind this article is providing general information and not individual financial advice.