Key for New Investors – Prepare for Unexpected Expenses
Real estate investing is a popular strategy for making money and laying the foundations for a secure financial future. You don’t have to look too far to find people who have had success with real estate, especially in recent years as Australia has seen rapidly appreciating prices in some areas which have made many property investors happy. But there are things friends, family and others who are having success with property investing, won’t readily discuss. Property investing has many upsides, but you also need to be aware of the downsides, and this is especially so when it comes to all of the unexpected expenses associated with owning a real estate investment.
Known Vs Unknown Property Expenses
When you acquire an investment property there is a range of expenses you know you will incur from the very beginning of your real estate investing journey. These things include stamp duty; legal fees; mortgage repayments; advertising for a tenant; property management fees; strata levies; rates and water; and, scheduled property maintenance.
With all of these costs, you know and are fully aware that at some point during your ownership of the investment property, you’re going to need to set aside some money for these kinds of expenses. They are ‘known expenses’ because you can readily reckon with them coming up during the property’s life-cycle.
There are other costs property investors will face during the lifetime of their real estate investment. Some of these costs will seem like they come out of nowhere. And, they can sometimes affect you at the worst possible moment. These are your ‘unknown expenses’, and they are an unavoidable part of real estate investing.
With a lot of new property investors buying real estate over the past decade, there are a lot of data points now available about what some of these ‘unknown expenses’ are likely to be; and, more importantly, some of the strategies you can use to deal with them.
5 Common ‘Unexpected’ Property Expenses
#1 – Roof and Guttering Repairs
The roofing and guttering are often not thought of by renovators and because of this many investors may be caught out. While bathrooms, kitchens, master bedrooms, and ensuites, receive all of the attention throughout a renovation, roof tiles, roof sheeting, and the guttering attached the house hardly ever receive attention during a renovation. This may be because they are out of sight and out of mind.
To avoid being caught out by this problem make sure before you settle on any investment property you have a building inspector look over every aspect of the property for any possible defects – this includes the roof and guttering. If it’s picked up before settlement you may be able to negotiate a price which factors-in roof and gutter repairs, or at the very least have these repairs completed before you settle on the property.
#2 – Special ‘Hidden’ Levies
Make sure before you settle on a property you check the fine print of any contract. This is absolutely critical because often, buried in the fine print of the contract, you will find clauses which make you liable for payment of ‘special levies’. This is especially common when you buy a property in an apartment complex, for example.
It is widely known when you purchase an apartment, you’ll be liable for payment of regular strata management fees which are designed to help pay for services that all apartment owners in the complex benefit from. ‘Special levies’ may come into effect if a major upgrade to the building complex is undertaken or serious remedial work is required to fix construction defects.
Like strata management fees, there is no real way to avoid paying these costs. So, there is only one way to handle them. Just as you need to set aside funds for regular maintenance, you will also need to set aside funds for this kind of expense.
#3 – Hot Water Plumbing
The plumbing for hot water is also one of those unexpected expenses when owning an investment property. As a new property investor especially, you need to be aware that hot water systems will need replacing at some point due to corrosion anyway. The best way to handle this kind of ‘unexpected’ expense is to keep aside funds along with your scheduled maintenance planning. Hot water systems tend to last for 5 to 10 years and it is not uncommon to see property investors needing to replace them within a few years of acquiring their property.
#4 – Household Air Conditioning
If there is one main gripe that tenants have, it is that the heat in the house throughout the summer months is unbearable. In older properties without air conditioning, this can lead to tenants who are otherwise good, deciding to move elsewhere into a property that is air-conditioned. Anyone who can remember the 47 degree temperatures we had last summer can probably sympathize with anyone who had to suffer in a house without air conditioning.
You could help improve your cash flow and make your tenants more comfortable by seeing if they would be prepared to pay a little bit more rent each week for you to provide air conditioning where the property doesn’t already have it. With the extreme heat that we suffer here in Australia, there are probably few people who wouldn’t see the value in spending a few extra dollars a week to be more comfortable during the summer months.
However, if you already have air conditioning in your property, you need to make sure the air conditioning is in working order for your tenants. This will require regular annual servicing and cleaning of the filters and vents. By doing this, you can extend the life of your air conditioning unit and possibly get up to 10 years life from your air conditioning.
Good air conditioners can cost between $1,000 to $1,500 plus extra for installation. Their annual servicing costs are between $80 to $120. That may not sound cheap, however, it is far less expensive than some of the other costs you may face when it comes to ‘unknown’ expenses.
#5 – The Cost of Evicting a Tenant
Most tenants and landlords have a good working relationship. Successful and experienced property investors know how vital to their real estate investing success good tenants are. Because they pay their rent on time and take good care of the property very good tenants are in high demand by the real estate investing community. If you have a good tenant you’ll want to keep them.
Sometimes, though, things can go wrong and there is a need for the investor to remove the tenant from the property. This can occur when there’s been serious damage to the property or the tenant has become very far behind on their rent payments. This is not an easy process, especially if the tenant resists eviction and the matter ends up in the tenancy tribunal. There will often be extra fees and charges to go through this process. But, if your tenant is many thousands of dollars behind in rent, your positive cash flow property can very quickly become a negative cash flow headache, leaving you with no option other than eviction.
With good planning and expert advice along the way, it is possible to be prepared for these unexpected expenses. As you learn how to deal with them, you’ll find they have less impact on your goals to build wealth and security through real estate investing.
The journey ahead is an exciting one!
The Vision Property & Finance team of experts can give you a wealth of advice to help you better understand what you’re facing in the months and years ahead. Call on 1800 004 663 or contact us today to start your property investment journey.