When looking at investment properties to purchase, as you go through your finances it is important not to overlook your costs. These costs are a major contributing factor to your return on investment (ROI) and will vary from property to property.
What could you expect to rent out the property for?Ask questions of the real estate agent as to whether the property is currently tenanted and if so, the terms of the contract. Find out what the market rent is by talking to local property managers.
A huge cost is mortgage interest. You should definitely sort out the details of your loan options and get an idea of current rates before running the numbers. Shop around to see which mortgage has the best terms to suit your requirements. Talk to banks, brokers, financial advisers or your accountant.
TAXES AND STAMP DUTY
People frequently use the taxes from the year when they purchased the property, assuming the taxes will stay the same. Taxes change every year. We all know about the extra burden of Stamp Duty, so don’t forget to include it when running your numbers.
Do not forget to take into account vacancy rate. Even when looking to invest in a desirable rental area, it’s best to always take into account a vacancy rate. Again, your local property manager should be able to estimate rate for the property you are interest in. If this area is of major concern for you, you can increase this estimate until you are comfortable. Typically most property managers would suggest a 5-7% vacancy rate, if this doesn’t feel right, increase to 10-12%. This will impact your numbers.
TENANT TURNOVER COST
Often overlooked is the expense of tenant turnover. This includes advertising for a new tenant, cleaning, repainting, replacing carpet, etc. If you expect to have high tenant turnover, like next to a university or seasonal job market, anticipate this to be a significant cost. For an eye-opening experience, read this post.
Insurance on investment properties are typically higher than owner occupied, single family properties. So get an insurance quote on the property instead of basing your expected insurance off of the insurance bill for your house. Your broker will advise you on which policies will give you the best cover.
This is by far the most difficult number to estimate. It depends on the property, whether you fix some of the problems yourself or hire outside help, and random luck.
Be sure to check what the tenants pay for and what the owner pays for. This includes all the utilities and lawn maintenance. In addition, there may be owner expenses like corporate management fees.