Property investing is a time-honoured strategy for making money, whether via long-term capital growth or in the short term through positive cash flow.
There are many stories of how investors have gone from pauper to prince due to making the right property purchases, as well as how they’ve set themselves up for early retirement by building a profitable portfolio at a young age.
However, a new investor should be aware that expenses don’t stop with the purchasing costs involved in buying a property – and these costs, which include stamp duty, conveyancing fees and the deposit, can be hefty.
As much as landlords would like to hope that property is a ‘set and forget’ asset class, this is not generally the case.
Once you have leased your property out, there may be unexpected expenses that you should prepare for in advance in order to weather the storm financially. Here, we list seven of the most common yet unexpected property ownership costs.
1. Roof repairs
Renovators often neglect this part of the house, but it is vital to keep the roof in good condition in order to avoid further, more expensive maintenance issues down the track.
If you have an established property that is around 20 years old or older, it may be worth getting the roof checked to determine if it needs to be repaired before leaks and mould become an issue.
Aside from repairing it, you can also spruce up an aged roof with a refreshing new paint job. There are various types of paint made specifically for roofs and the outdoors, though this is definitely a job you shouldn’t do yourself; leave it to the professionals with their scaffolding and harnesses. Roof repairs and repainting expenses can come to between $2,000 and $5,000 for a one-storey dwelling, or more for a higher property, but the investment can add value to your property if you update the roof with a modern new colour.
2. Special levies
Apartment owners are accustomed to paying body corporate fees, but special levies can sneak up and surprise you. This is something you should be especially careful to prepare for if your investment property is an older apartment.
If repairs are necessary and there isn’t enough money in the sinking fund, the body corporate may raise a special levy, which could set you back by anywhere from a few hundred to several thousand dollars. Since such expenses are typically related to capital works improvements, unfortunately they may not be tax deductible.
“You would first need to determine the purpose of the special levy before ascertaining whether it is deductible,” explains David Shaw, CEO of WSC Group.
“Only the portion that relates to deductible repairs under section 25-10 ITAA 1997 would be deductible when the special strata levy was incurred ¬– regardless of whether the repairs had yet to be conducted when the levy was incurred.”
3 CONFUSING PROPERTY NON-DEDUCTIBLES
Initial repairs are not claimable
According to WSC Group CEO David Shaw, an initial repair is considered as such if “it was incurred to rectify the defects that existed at the time of acquisition”. These cannot be claimed immediately on your tax return but can be added to your cost base when you sell.
1. Capital improvements are not generally deductible
An initial repair is an example of such an expense, though Shaw notes that the cost of a capital improvement can be added to the property’s cost when determining future gain or loss. In the process, it may become eligible for capital works deductions under Division 43 (2.5% per annum).
2. Structural reno expenses are not deductible
Renovation expenses that “establish, replace or enlarge the profit-yielding structure” and that “replace an asset in its entirety” are unable to be claimed at tax time (though again, they can be accounted for when you sell).
3. Hot water systems
Another crucial element you need to keep checking up on is the hot water system. Hot water systems wear out after a number of years as a result of corrosion. In areas with ‘hard’ water these systems are also more likely to deterioriate.
The cost of a small hot water system by brands like Rheem or Rinnai can be as low as $400–$1,000, depending on requirements, though larger tanks can cost up to $2,000 or higher for energy-efficient or solar models.
Tanks lined with glass or enamel may be good for five to 10 years, while a stainless steel tank lasts for seven to 10 years and a copper tank for roughly seven years. Systems with heat pumps should be all right for a decade.
"If you have an established property that is around 20 years old … it may be worth getting the roof checked"
The warranty details for hot water systems generally include the expected lifespan, so try to ensure that you have a copy of the warranty when you buy a property.
4. Air-conditioning units
In the hot summer months an air conditioner can be a necessity in certain parts of Australia, so you definitely need to ensure that you have a good working unit for your tenant’s use.
With regular annual servicing and cleaning of the filters and vents, an air conditioner can last 10 years or more. However, once the unit starts to show signs of breaking down, such as using far too much energy, leaking, emitting strange smells, or being too warm or cold, it might be time to seek out a replacement.
A good air conditioner can cost over $1,000 (plus installation), whereas a maintenance service can cost around $70–$100. If you’re looking to save and you have a small space, perhaps an air cooler will do the trick, while costing you less.
Most investors understand that they’ll have to hand over some money for renovations at some point during their property ownership journey.
However, many don’t realise just how expensive renovations can be – simply replacing a shower screen door can leave little change from $1,000, while the big-ticket items like flooring can set you back thousands of dollars.
Just as importantly, the tax office treats ‘renovations’ very differently to ‘repairs’, meaning some of these expenses are not immediately tax deductible.
“Repairing kitchen sink taps with similar material and efficiency should be considered as deductible repairs, provided that the defect does not exist when the client purchased the property,” says Shaw.
“On the other hand, renovation expenses are not deductible – for example, replacing a broken kitchen sink tap while renovating the entire kitchen with new material of higher efficiency.”
THE TRAVEL BUG
» Travel expenses can be steep if your property is located interstate, since you need to allot funds not just for travel but for accommodation as well.
» Keep in mind that, as of 9 May 2017, travelling to inspect your investment property is also no longer tax deductible.
» You may want to engage a local, on-the-ground building inspector or real estate agent to review your property on your behalf – their fees are tax deductible – rather than forking out the funds to travel there yourself.
6. Yard maintenance
If your investment is a house with a yard, you may find yourself having to repair fences, gates and retaining walls. There are professional lawn care companies out there that can help maintain the garden on a regular basis, but larger backyard maintenance issues, like replacing a retaining wall, can be costly.
Furthermore, these types of repairs can be considered capital works expenses, which means they’re not immediately tax deductible.
Shaw confirms that when repair expenses “establish, replace or enlarge the profit-yielding structure”, these are not deductible.
In the event that you need to evict a tenant, the process can be far more troublesome than just throwing their bags on to the street and being done with it – it can actually drain you of months of profit.
One investor, Daniel, says he tried to evict a tenant who was consistently falling behind in their rental payments. The property manager issued an eviction notice, and that failed to elicit a response as the tenant was overseas. Then the property manager delivered the shocking news:
“Unfortunately, if you want to proceed with evicting the tenant, you’ll have to pay for removal and storage of their items until the tenant returns from overseas.”
Rather than shell out thousands of dollars, the landlord waited three weeks for the tenant to return and move out on their own. When they finally left, they were nine weeks’ behind in rent.
Though not all eviction processes are so lengthy or time-consuming, the assumption that evicting a tenant can cost a minimum of three months’ worth of rent can ring true. You have to consider legal expenses, lost rent, changing of locks, and other potential repairs needed, as well as vacancy periods while advertising for new tenants.
We have outlined some of the less common expenses involved in property ownership, and though they may not crop up frequently it’s definitely wise to budget for these types of costs.
Try to set aside a small amount from your profits from rent in an emergency fund so you won’t be caught off guard when the time comes to deal with surprise costs. Some investors aim to set aside 10% each week, but any amount you can spare will help you manage unexpected costs when they crop up, without adversely impacting on your day-to-day finances.
"Most investors understand that they’ll have to hand over some money for renovations at some point"