INVESTORS ALWAYS TAKE INTO CONSIDERATION THE COSTS OF OWNING AN INVESTMENT PROPERTY
Count the cost – Cash Flow is always king!
There are many factors feeding into your property’s performance, such as where we are situated in the current property market cycle, interest rates, housing shortage, business and consumer confidence, employment and population growth, to name a few. Therefore, while investing in property is a proven path to building real long-term wealth, it should be approached in the context of a medium to longer term type of investment.
Knowing the numbers is vital to any business and it’s no different in your investment property business. There are likely to be holding costs in the early years associated with any decent investment property purchase. Those who try and tell you otherwise may ‘conveniently’ show you figures that are based on 80% borrowings, for example, whereas in reality most people borrow the deposit and costs too (albeit secured against another asset such as the family home or an earlier investment property).
At MRD we will provide you with a detailed and accurate (as much as is humanly possible, but very close to actuals regardless) cash flow analysis report that factors in all the costs; including an assumed 3 percent rental vacancy e.g. It would be counterproductive to ‘do all the hard work in the beginning’ only to have to turn around and sell an investment property due to financial stress a few years later. It ought to be assumed that buying and selling an investment property within a five year timeframe will result in you losing money. This is not a hard and fast rule and conditions may have been very favourable during those first five years but again, we should invest in property with at least a medium term, but preferably a long term plan.
Have you done your sums and counted the costs from the beginning, taking into consideration your ‘worst case scenario’ and what would happen to your investment should this happen? Is your employment or income stable? Or do you have the right risk strategy in place to cover your family should the worst happen? MRD can provide you with a full statement of advice which will map out a plan for the protection of your wealth to ensure that you are covered in such circumstances.
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Yes, there are generally some holding costs associated with owning decent investment properties in the earlier years but these don’t have to be significant. Depending on what you buy (e.g. houses or apartments) and where you buy (Sydney and Melbourne are more costly to get into and typically deliver lower rental yields than Brisbane) the amounts will vary. The combination of the tenant (rental income) and the tax man (claiming property expenses and property depreciation) should cover most - and in some instances all of the costs associated with the ownership of the property.
Over time, as rents rise, even an investment property that started out delivering a negative cash flow will become positive.
We recommend that you look at cost of servicing the loan on an after tax basis, this way you can see the cost in real terms.
Click here to download our FREE e-Book on the costs of owning an investment property
Importantly, MRD will help you unpack all the numbers associated with your investment property purchase to empower you to make informed decisions.
MRD’s team of internal and external professionals will support you in your property investment business in exactly the same way as in a traditional business. This includes providing vital advice around taxation which can change over time. Considerations of Stamp Duty, Capital Gains Tax and Land Tax all need to be factored in to ensure you accurately calculate your (property investment businesses) running costs.
As interest rates vary over time and impact on your cash flow bottomline, MRD prefers to factor in a higher rate than banks and non-bank lenders are offering. It’s prudent to be conservative when analysing the numbers as an added form of protection. On the flip side, rising interest rates feed into inflation and precipitate rental increases.
Banks and non-bank lenders build in contingencies for your (and their) protection. For example, when calculating whether or not you can service the loan on your investment property they typically factor in just 80 per cent of the market rental amount. This is in consideration of costs like tenancy management, potential vacancy periods and maintenance on the property. If you do not have professional cash flow analysis software to produce accurate figures you could do something similar.
Having a more accurate outcome is best and MRD clients are provided with this as part of our standard service. Contact us today to discuss your needs and have us assist you to making your next investment property purchase a winner for you.