Hidden landlord costs that could bleed you dry

Buying an investment property is an exciting milestone – as long as there are no hidden costs. Picture: Ben Clark

If home ownership is the great Australian dream then property investing must be the national sport, with many Aussies looking to property investing as an ideal way to build wealth over time. And let’s face it, the prospect of your tenants paying off a decent chunk of your mortgage each month as the value of your asset grows does sound like an ideal situation.

The problem is, not all investment properties work out to be such great deals. In fact, some can bleed you dry.

Don’t get stung with hidden expenses – do your due diligence before you commit.

HIDDEN COSTS

For the new or not so experienced property investor, there are some costs that may go under the radar at the time of purchase and emerge as hidden expenses later on.

“The hidden costs can catch many residential investors off guard,” CEO of Rethink Group Scott O’Neill says.

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One example is special strata levies, which can unexpectedly take tens of thousands of dollars from your hip pocket.

Insurance is another prime example, the cost of which has “tripled post-floods” he says.

CEO of Rethink Group Scott O’Neill.

“Vacancy periods cost you $500 plus weekly – while still paying the mortgage,” he adds.

The biggest killer, he says, is negative cashflow – something that can be worse than expected if you don’t calculate your expenses properly in the first place.

“This is exactly why it’s important to calculate your cashflow on a net basis so you understand your true holding costs,” he says.

FROM DEAL TO DISASTER

Sometimes an investment purchase can look great on paper, but when you look into the details it’s rotten to the core.

“I’ve seen ‘great deals’ become financial disasters overnight,” O’Neill says.

One example was a unit block with major structural issues in which each apartment had special strata levies of more than $50,000.

Michael Pell from Propell Property. Picture: supplied

“One client’s ‘bargain’ apartment needed $80,000 in rectification work,” he says. “Always get proper strata reports and building inspections.”

Red flags to look for include ageing strata complexes, low sinking funds, deferred maintenance and poor or dodgy body corporate management, he says.

MAJOR MAINTENANCE

It’s also important to understand the maintenance issues you will be up against at the time of purchase, says Propell Property managing director Michael Pell.

“There’s lots of things to consider because as properties become 15, 20, 20 plus years old, they can become maintenance headaches,” he says. “Check for concrete cancer, check for asbestos.”

Strata complexes sometimes have special levies.

A Pest and Building report is essential to pick up on any major issues that might need rectifying, he says. It’s also important to check whether the property is in a flood or bushfire zone and whether it is insurable.

“That’s probably the biggest danger – that you buy a property and you don’t understand the maintenance issues or the problems with the property,” he says. “If you haven’t sorted that out upfront, there might be hidden costs for sure.”

HOW TO AVOID HIDDEN COSTS

Rethink Group CEO Scott O’Neill offers the following tips in order to minimise hidden expenses when calculating the running costs of an investment property.

* Strata reports – check the sinking fund balances, special levy history, and upcoming major works. Make sure you get at least five years of body corporate minutes to help you spot any recurring issues.

It can be upsetting to fork out huge amounts of money on a problem property over time.

* Pest and building inspections – this is a critical step that can help you identify any structural or maintenance issues.

* Council searches for flood zones, heritage overlays, or nearby development approvals – you need to know what you are up against as time goes by.

* Get insurance quotes before buying – some areas are uninsurable. Make sure you take this step regardless of property type.

* Build a buffer – calculate 1-2 per cent of property value annually for maintenance, plus vacancy allowance.

* Research rent – get rental appraisals from multiple agents and check rental and vacancy data online.

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