Imagine that you are finally ready to invest in real estate. With your deposit and pre-approval in hand, you can visualise the potential rental income. Everything looks good on paper; you’ve calculated the rental return and added up all the numbers. However, as reality sets in, your meticulously planned budget begins to reveal unexpected gaps.
If this sounds like you, you are most definitely not alone. There are many first-time home buyers in Australia who are shocked by the costs they didn’t expect. While legal fees and stamp tax are commonly discussed, there are numerous other costs that can unexpectedly surface.
Let’s look into the murky world of secret property investment costs and point out the costs that even experienced investors find surprising.
Maintenance Mysteries
This is where many investors are most surprised when it comes to care. While you may budget for routine maintenance such as yearly pest control and yard care, properties often experience unexpected breakdowns.
Think about the secret costs of house renovations that seem to go up. A simple bathroom update can quickly become a big problem if you find old plumbing that needs to be updated or asbestos that needs to be taken care of by a professional. Even seemingly insignificant changes can necessitate updating the electrical work to meet code requirements.
Seasonal upkeep costs for investors are also often a surprise. In Queensland, the rainy season might be defined by cleaning out gutters and fixing roofs quickly. In the South, heating systems need to be serviced before winter comes. It’s most likely for air conditioners to break down during the hottest weeks of summer, when parts are hardest to find and most expensive to fix.
Then there is tenant wear and tear that is worse than normal. Carpets are usually cleaned between renters. What steps should you take if unreported pet damage necessitates the replacement of the entire floor? Alternatively, if the final check uncovers smoking damage, does it necessitate repainting the walls?
What Insurance Is All About
Most owners know they need landlord insurance, but it’s difficult to know exactly what it covers. Flood damage is typically not covered by basic rental insurance, despite the fact that it appears to cover everything. Depending on where your property is located, you may need to buy separate, more expensive flood insurance.
Then there are the extra payments, which could add up quickly. If you file claims for many small events spread out over the course of the year, the extra money you get can really cut into your returns. Some owners find out too late that they are at risk because of waiting periods or because their policy doesn’t cover certain types of rent loss.
Public liability insurance is another cost that some investors find surprising. This is especially true for those who own units in smaller buildings where individual owners are responsible for common area insurance instead of body corporate fees.
The Cost of Financing Keeps Going Up
Even if your mortgage rate stays the same, the costs of keeping and handling the loan can change in ways that might surprise first-time buyers. It’s clear that lender’s mortgage insurance costs money up front, but what about the ongoing fees that could add up over time?
Many investors don’t know that some lenders charge yearly package fees on investment loans. If you have a way to get a refund, there may be fees for moving between interest rate products and penalties for paying off your loan early if you are ahead of schedule.
People considering strategies like paying off mortgage faster by making extra payments should know that some loan products have fees or limits that aren’t always made clear at the start when extra payments are made.
If you are looking into more complex ways to spend, like using SMSF lending to buy investment property through your self-managed super fund, the compliance and administration costs can be high and ongoing. Some of these are the actuarial certificates, audit fees, and expert accounting costs that can easily run into thousands of dollars every year.
The Truth About Tax Checks
Negative gearing can save you taxes, but it has costs. It’s not cheap to hire a skilled tax accountant who also knows a lot about real estate investment. Often, the fees are much higher than the cost of just preparing your taxes.
Depreciation plans can help you get the most tax breaks, but they need professional quantity surveyor reports, which for a property that has been used for a while could cost between $600 and $1,200. Updating these reports after major property changes will increase your ongoing costs.
For tax purposes, having records is critical. Many investors don’t realise how much time and money it will take to keep detailed records of all property-related bills, receipts, and letters.
Surprises at Work: Body Corporate
While body corporate fees are often included in the initial calculations for individuals purchasing apartments or townhouses, unexpected special levies can arise. These one-time fees for big building repairs, upgrades, or maintenance can range anywhere from a few hundred dollars to tens of thousands of dollars, depending on the work that needs to be done and the number of units you own.
No matter how much money an owner has, they have to pay special fees when there are big problems with the building, when lifts need to be replaced, when the roof needs to be fixed, or when shared areas need to be painted. Some buildings also charge extra for improvements like making the building more energy efficient, adding security systems, or making the gardens look better.
Changeover Costs and Empty Rooms
Even when rental markets are tight, there are times when there are no tenants. These times can last longer and cost more than thought. Besides the obvious loss of rental income, there are costs involved in getting the property ready for new renters, such as hiring a cleaner, making small repairs, and sometimes staging the property to make it look better.
Especially in rental markets where premium listing placements can make the difference between a quick renter and a long vacancy, advertising costs for empty homes can add up significantly. Lessees increasingly desire photos, floor plans, and video walkthroughs, which incur additional costs.
The Last Thought
Investing in real estate can be very rewarding for you personally and financially. But, to be successful, you need to make a budget that includes these hidden costs. The investors who do well are the ones who plan their finances with big “buffers” and see unexpected costs as a normal part of investing, not as something to be afraid of.
Besides the normal costs you’ve planned for, you might want to set aside at least 1% to 2% of your property’s value every year for repairs and other unexpected costs. This buffer could potentially distinguish between a minor inconvenience and a significant financial crisis.
Have you encountered any unexpected costs while investing in real estate that caught you off guard? How have you prepared to handle the unforeseen expenses that accompany home ownership? Please share what you know in the comments section below so that other investors can feel safer as they navigate these potentially dangerous seas.