The forgotten costs of investment properties

14 Jun 2013

By Finn Dorney

​There are many misconceptions around the real rate of return on investment properties. This is often due to the forgotten costs associated with them.

Many individuals have arguably done very well from investment properties in recent times, mainly due to Australia's low inflation driven property boom of the late 1990s and early 2000s. These good times have subsequently caused an increased level of interest in investment properties since the perception is that everyone can make money in property.

Below I have outlined some of the common costs of investing in property:

  1. Stamp duty
  2. Insurance that is building and landlord
  3. Council rates
  4. Land tax
  5. Maintenance and upkeep
  6. Water bill (fixed portion)
  7. Real estate property management fees
  8. Real estate commissions and advertising when selling
  9. Legal fees
  10. Valuation costs

If we take for example, the purchase of a $400,000 investment property which is subsequently held for five years and then sold. Assuming the property is neutrally geared, that is the rental income exactly matches any borrowing expenses. Then doing the sums using typical costs, the property would need to increase in value by 36% over a five year period and be sold for $544,000 to break even, cover costs and allow for inflation of 3% per year.

Since I cannot foresee the future, I cannot predict what property prices will do in the short to medium term. When looking over the longer term coupled with these costs however, it is no wonder that the real rate of return on offer from investment properties can be much lower after taking into account the forgotten costs. So do your sums and be sure to include all the costs before making any decision.

To learn more about Finn, view his online profile.

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