A common error made by inexperienced property investors is underestimating the costs of owning the property in the long run. Owning an investment property not only comes down to your ability to buy it in the first place, but also your ability to cover the ongoing costs.
It’s essential that you understand your cash flow to ensure you can afford to cover the shortfall between your rental income and expenses. It’s easy to put together a simple spreadsheet on this or you can get your accountant or bookkeeper to do it for you.
Let’s cover the fun stuff first – rental income and deductibles
When assessing your rental income, you need to factor in vacancy rates. Rental demand is very strong at the moment, but to be safe I’d factor in two or three weeks’ vacancy per year over the long term.
While you definitely want to retain good tenants, you owe it to yourself to get an appropriate return on your money. Get your managing agent to advise you, at least once per year, as to whether the rent can be moved up a bit. Depending on what the market is doing, I suggest a $10 or $20 increase in rent every six to 12 months.
Don’t overprice your property. Usually the only tenants who will pay above market rents are those who have been knocked back from other properties. You’ll also get a higher turnover of tenants. They’ll sign the lease and then their friends and colleagues will tell them they’re paying too much and they’ll leave as soon as the lease is up.
Regarding deductibles, many property investors short-change themselves by claiming less back from the taxman than they are entitled to. Depreciation is commonly missed. Homes are depreciable over 40 years and you can claim 2.5 per cent as a deduction each year. You can also claim a depreciation allowance on capital improvements such as garages and new kitchens as well as fittings and fixtures like carpet and hot water heaters.
The best way to ensure you have all depreciables covered is to get a depreciation schedule drawn up by a quantity surveyor. They’re up-to-date on the latest tax rulings and are like bloodhounds when it comes to finding items to depreciate!
The costs of owning an investment property are as follows:
To help you keep afloat on negatively-geared investments, the tax office will let you vary your PAYG withholding tax rate depending on your anticipated losses. This means you’ll have more cash in your pocket each month to cover expenses as they arise.
You will need to talk to the ATO or your accountant for more details.
Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.