The reality of owning a rental property
May 11, 2021
Hi guys, it’s Michelle Knight from Little Miss Bookkeeping. And today I wanted to run through the reality of owning an investment property. Recently I’ve seen a lot of discussion on social media platforms like Facebook groups around property – either questions from people who currently have an investment property or rental property, or people looking to purchase an investment property as a part of their overall investment strategy. Now there was a lot of discussion around cost and benefits and that sort of thing and I suppose I wanted to share what the reality is with myself owning an investment property and seeing a lot of other millennials potentially moving into that space.
Now, there were myths around landlords, that they’re these wealthy people who price gouge/put their prices up for no other reason than to make a profit. And they are these bad people that shouldn’t be trying to buy all these properties when there’s not enough places for people to live. That was what got me triggered a little bit. And the point of this video is to educate you guys around what the reality of owning an investment property is, from a cash flow point of view. This video isn’t going to be specifically around the tax advantages, deductions or how negative gearing works. But I am exposing myself a little bit, just to show you how much it costs me on average per week to hold the property.
Myself and my partner, we reside together in my partner’s residence. There’s no reason for me to continue living in my place, which is just a little two-bedroom townhouse that I’ve purchased as my very first place. That’s been rented for a couple years now. And what I’ve done is I’ve put together a little Excel workpaper. I’m a very visual person, so I thought others might enjoy me going through what these costs are. And remembering that this is based on my situation. Everyone’s completely different. It’s based on where the property is. And we know that across Australia, there’s different situations, different locations, different prices, x y z. But I thought it would kind of give a good overall overview and baseline for people who are potentially looking into property, and really be ready for those costs, especially if, for example, you’ve never owned property before. And when you become an adult, you’ve got to start thinking about things like rights and body corp and water and all these other things that we do take for granted when we are adolescents.
So what I’ll do now is I’m currently screen recording my iPhone. And I’ve got here a breakdown of the property itself. I’ve put on here that it’s just a two-bedroom townhouse, I live on the Sunshine Coast, that’s where the property is located. Now per week, I rent that $420. That’s pretty much market value as is. Now if we go through all the costs, I’ve broken them down per week, based on what I paid last financial year, so I pulled out my tax return and I sort of had a quick overview of what that was last year because it’s probably going to be about the same or maybe a slight increase with inflation.
My property manager fees are about $2,000 a year. I’ve done the whole self-manage and use the property manager and for me time benefit cost property manager – highly recommend. So that’s why we’ve got someone looking after that. I pay about $1,000 every six months for my council rates, my body corps again about $1,500 every six months, so $3,000 a year. I pay a landlord insurance which is at $300 a year. Water, so in my lease the tenant pays the water usage cost and I pay the fixed fee/ fixed cost which is the cost of the pipes as opposed to the use of water. So that’s kind of like a 50/50 split depending on. But I’ve put in there a provision for the fixed costs that I pay for, which is about $1,000 a year. And my repair maintenance is pretty low. When I purchased the property, it was brand new, so it’s not a lot of ongoing repairs and maintenance. But you do have to do your smoke alarm compliance and that sort of thing. So I put $200 per year and it would probably go up a little bit. If you have a look at this spreadsheet, my rental incomes $420 a week. Now out of that if we deduct every cost that I currently pay, and that’s not considering any capital investment where I might have to replace a kitchen or a dishwasher or something like that, the ongoing cost of the property is about $163. So, in reality, my net income is about $257.
If we keep reading down, my current mortgage repayment on that is about $1,700 per month, or $418. When we think about it, my weekly rental income of $420 just covers my average mortgage payment of $418, not including all my ongoing costs. If we keep reading further down, this puts me in a deficit of $161 per week, or rather, per year, it’s about $8,000 odd a year, I have to cash flow myself. So in reality, from a cash flow point of view, what I do each week, is I put away a set amount into a bank account for me to cover costs. So according to the spreadsheet, I need to be putting aside $163 per week. So when my next bill comes up, when my council rate comes up, when my body corp comes up, my insurance renewal comes up, I have that cash sitting there. Now, it’s quite clear that even though I am getting $420 income, that only covers my mortgage payment, and I’ve got to cashflow all those costs. This is me, this is my situation, this is my scenario. And I really wanted to show you that so you guys understand that it’s not all cash money, you know, raining from the sky here.
You might be asking “Michelle, why would you forecast $163 per week, or rather $8,000 a year just to hold this rental property?” . Now, in summary, this is in line with my overall investment strategy around my tax planning, around capital gains, growth in property. It’s not something I want to go through in detail now. But just because my property income, doesn’t quite cover the costs of my property. To me, I’m totally comfortable with that. To me, I have $163 extra weight to set aside now account to make ongoing payments when they’re due, knowing that the rental property situation is beneficial in regards to how it gets applied to my individual income tax. I’m banking on capital and growth, where one day I eventually might sell that property.
So what I’m going to show you is if we change the rental income. Now, let’s say years down the track, the costs were about the same, and I could rent this property for a lot more. Let’s show that situation. This is going to be a pretty high jump, but let’s make that $550. Let’s assume, and it’s probably not gonna be the case, but assume everything remained relevant. Everything remained the same where I only have to cash flow $30 a week as opposed to another $100 or more, or rather about $1.6K a year. Let’s pretend that I had a significantly lower mortgage on my property. When I purchased my property, a few years ago, I had quite a high LVR. I just wanted to get into the property. I was totally comfortable with that. Let’s pretend I had a slightly bigger deposit. And let’s say my mortgage repayments were about $200 a week.
If we have a look now, we can see that with everything remaining the same $420 a week, I have cost of $163 a week, and my mortgage repayments were only $200. I am actually cashflow positive, a whole $57 so that is my raining money cashola figure there and per year, that’s about almost $3,000 a year, which is flowing through to me. That’s obviously the point that as an investor you want to get to. That’s really a summary or the reality of owning an investment property.
So that is really a quick short and sharp breakdown of how much it costs me to hold my investment properties. An example of where if you had a significantly reduced mortgage, the cashflow benefit of that would be. I haven’t run through a tax deductibility, tax planning, tax advantage point of view on this or the application of what is negative gearing and how it all works. But I hope this was helpful if you really enjoyed this video, please subscribe to my channel and give it a like, it really does help me to provide more valuable content to you.
As always, if you have any specific questions of around you and your scenario, please do speak to a trusted tax professional to get the right advice. Thanks for watching and I will see you in the next video. Bye!