5 “hidden” real estate expenses that blindside investors

Expert Advice with Brett Warren 24/10/2017

Investing in property requires an ongoing input of cash – and sometimes it's when you least expect it.

Don't get me wrong: investment grade property will also deliver more than enough capital growth to make up for the expenses along the way.

The key is to make sure that you have the cash flow to hold your portfolio over the many years that it takes for the magic of compounding to work.

So to ensure that you don't get blindsided by unexpected expenses, here are five that you'll encounter along your investment journey.

1. Vacancies

No one wants a vacant rental property on their books but it can and does happen.

Why is that?

Well there's often a period of time between when one tenant shifts out and the next one shifts in.

During that period – that's right – there will be no rent coming in to help pay the mortgage.

Also, in soft rental market conditions – which you will experience during the course of your property ownership – you may have a vacant property for a few weeks.

And there really is not much you can do about it...

Apart from ensure that you are charging rent that meets the current market conditions and that your property is looking the best that it can.

That's why it's vital to have a financial buffer – such as a line of credit – to see you through any vacancy periods.

2. Maintenance and repairs

As the saying goes, land appreciates and buildings depreciate.

In fact, buildings will someday become obsolete because, while they're built to last several lifetimes, they're not meant to last forever.

The way that you slow down your property's aging process is to keep up with all maintenance and repairs.

This could be reactively when something, like a stairwell railing, needs replacing.

But it should also be proactive, such as replacing carpets and window coverings, to ensure that your property is in tip-top shape and will attract tenants more easily as well as a higher rent.

Of course, maintenance and repairs cost money – and sometimes there are emergency repairs which need to remedied immediately.

So you better make sure you have the cash available to do so.

3. Owners corporation or body corporate fees

In Australia, the number of people living in units, villas and townhouses is increasing every year as our population grows, but we're not growing anymore land.

Every owner of a strata-titled property also belongs to the complex's owners corporation or body corporate.

Every quarter, each owner pays administration fees to the company that manages the scheme.

They also have to fork out money for the scheme's sinking fund, which is used to pay for the upkeep of the building as well as other expenses.

The costs of these fees can vary widely depending on the age of the building, but $1,000 a quarter is probably about average.

So you need at least $4,000 a year just for these fees – not to mention council rates and water charges.

And, alas, money doesn't grow on trees.

4.  Insurance

While your owners corporation fees will also pay for building insurance premiums if you own an attached dwelling, if your investment property is a house you'll need to stump up for building insurance yourself.

Other insurances that you'll need to pay for include landlord's insurance, which covers you for such things as malicious damage by tenants or visitors as well as loss of rent.

The premiums for landlord insurance can vary so make sure you ask around to get the best deal for your individual circumstances.

5. Property management fees

As I've said before, it's always a good idea to get a professional to manage your investment properties.

That's because property managers are aware of all the relevant legislation that regulates the rental market.

Plus, it's always wise to keep a business relationship with your tenants, which many private landlords struggle to do.

Like any professional service, however, there are fees to pay for property management.

The first one is a percentage commission of the weekly rent to manage the property on your behalf.

So, if your weekly rent is $500, the amount that lands in your bank account maybe about $450 to $460 once the property management fee is deducted.

The second and third expenses are lease renewal and letting fees.

If you have a long-term tenant, but one who only signs a six-month lease, then you'll have to pay for the property manager to renew the lease every six months.

And that can be about half or one week's rent.

That's one of the reasons why it's a good idea to have 12-month leases on your investment properties – unless you're considering selling.

Likewise, if your tenant shifts out, then you'll need to pay one or two week's rent for your property manager to relet your property.

Don't get me wrong: these fees are appropriate for professional property management and will ultimately save you money in the long-run.

You just need to be aware of them so you're not caught financially short.

The main point is...

Investment grade properties should grow in value significantly over the years that you own them.

But that doesn't mean that you won't have to put your hand in your pocket from time to time to hold them.

The key is to make sure that you have a financial buffer in place to make those expenses as pain-free as possible.

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Brett Warren is the Senior Property Strategist at Metropole Properties in Brisbane and uses his 12 plus years property investment experience and economics education to advice clients how to build their portfolios.

He is a regular commentator for Michael Yardney's Property Update.

Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.