Investment Property Cost You Should Plan For Ahead Of Time
October 7, 2022
Property investment has often been considered by financial advisors to be a pretty sure bet. That said, there are some additional costs you’ll want to be prepared to encounter along the way which some new investors do not always consider ahead of time. Unfortunately, many new investors often don’t understand the total cost of purchasing and maintaining a property. Ongoing costs are often largely underestimated when new investors are doing their first few cashflow analysis. Generally speaking, it is wise to allocate 25-30% of the total rental income you expect to receive for regular ongoing costs and maintenance. The largest costs to keep in mind when doing a cashflow analysis is the interest rates being charged for property loans which have recently been raised due to inflation issues. These higher rates are already causing a slowdown in lending across the board and are expected to continue through the end of the year. Since rates can rise quickly and unpredictably, it is a good idea to factor in a buffer contingency in all of your cashflow analysis to account for any potential rate increases.
A sizeable down payment will be needed to get into the market on any new investment property project you plan on pursuing, especially considering that borrowers have recently tightened their lending requirements on new loans. Lenders prefer borrowers who have at least 20% of the full value of a house saved up in advance for a down payment. It is still possible to get a loan if you have a smaller deposit saved, but you may have to take out additional insurance and the property will also likely take longer to pay off the total balance with interest.
The bank or lender you use will often charge a few different fees, which can average around a thousand dollars or more. These fees typically cover the loan application process as well as other documentation fees. It is also not uncommon for lenders to charge an additional monthly loan service fee, depending on your lenders terms of agreement which you should read carefully before signing and agreeing to any contractual obligations. Some other common fees include redraw fees on your loan balance, so understanding the upfront, ongoing, and hidden loan fees ahead of time is paramount to being successful in any investment project you plan to execute.
Home Inspection Reports
A home inspection is one of the most important steps when purchasing a property but is too often overlooked or passed over in an effort to save some quick money. It is critical that you hire a licensed professional home inspector to visit the property and provide a full written report outlining all of their findings of potential issues with the property. Many inspection companies, additionally, are now including video presentations along with their detailed written reports so consumers can quickly and easily see what issues the inspectors are calling out in their reporting. Home inspection costs will vary state to state, as well as charging different amounts depending on the properties size, building structure, and any other additional inspections you want to be done such as thermal scanning or foundation elevation reports. An inspection for an average-sized property will generally cost around $500 to complete if you do not have any additional services you need to include. A professional pest-control report will also be needed, which will roughly add another $200 to the inspection cost total. Though the temptation to save a couple bucks in the beginning of an investment project may seem alluring to some, you should never ever skip out on hiring a qualified home inspector and receiving a detailed written home and pest inspection report.
Property Management Costs
Having a property management company manage your new investment property can be a smart decision and take a lot of the headaches of managing a property off your plate but the cost to do so can add up quickly. The average property management fees currently range between 5-15% of your weekly rent, depending on which company you decide to use. That is why it’s critical to ask any property management company you decide to utilize to call you for approval before organizing/performing any maintenance on the property. Depending on your skill level, there are often many smaller maintenance projects you can take care of yourself, which can help you save a ton of money in the long run.
The overall and ongoing maintenance costs of any new investment property should always be budgeted for from the very beginning whenever possible. Luckily, some of these costs can be offset through depreciation at the end of the financial year, which can provide you with a tax refund in some instances. That said, the tax breaks should not ever be used as a measure for your cash flow analysis on a project, as depreciation decreases over time. Planning for the above costs ahead of purchasing any new investment property can make all of the difference in whether or not the investment ends up being a worthwhile endeavor or loosing you hard earned time and money.