Ever wondered what the real cost of holding an investment property is? It might be a lot lower than you think and I’m about to show you a quick calculation so that you can work it out for yourself.
When I’m speaking to potential clients about investing in particular properties, one of the burning questions that always comes up is how much it’s going to cost to hold that property on an ongoing basis.
I’m going to show you a quick, ‘back-of-the-napkin’ exercise that we can do to calculate those costs for you when you’re out in the field and you’re looking at properties for yourself.
This is what you need to do to work the ongoing costs out for yourself
You can view the video here…
It runs like a really simple profit and loss sheet, meaning we’ve got income on one side and expenses on the other.
The first calculation is income, or rent.
As a national average right now, gross rental incomes are probably around 4%, so that’s the figure we’re going to use.
On the expenses side, we’re looking at interest rate payments, and if you’re out there looking at a mortgage, you’ve probably noticed they’re around 4%.
What a lot of people fail to remember, though, is that there’s maintenance costs involved like strata, water, and holding costs that are around 1% to 1.5% of the property’s purchase price every year that we need to include, so it’s good to add that on as well.
Interest Rates – 4%
Maintenance – 1.5%
Total – 5.5%
That gives us a net figure of -1% to -1.5% of the property purchase price every year to hold, so if you’re looking at a purchase price of $500,000, you can see that it’s going to cost you around $5,000 to $7,500 per year to hold this property.
Normally, I would say to you that if you can afford that cost from your salary, then this is a property that’s affordable for you – that’s around $100 to $150 per week.
We can do additional things to improve these figures.
For example, we can locate better quality properties that will bring you a solid income to increase your rental income.
That will change the equation slightly and bring it down to almost neutral or cash-flow positive situations in some cases, and that’s one of the real benefits of using a professional buyer’s agent.
Of course, you have to remember on the flip side, things can change with interest rate payments, and if your variable rate goes up to, say, 5%, you have to take that into account as well.
This quick profit and loss calculation will give you a good understanding of what you need on an ongoing basis to maintain your property investments.