Get the real cost lowdown on your rental property with this guide from Affinitas’ resident finance expert Tanya.
The long term goal of every investment asset should be to return a profit over an appropriate time frame. In the case of property, because of the high transaction costs to enter and exit the investment, the time frame should be at least 10 to 15 years.
Over time, a successful real estate investment should show growth in its income stream (rents), plus the actual capital value (sale price) should increase at a rate above annual average inflation.
Many people decide to buy investment property while still working, with the long term goal of using either the capital sale profit, or the rents, to at least part fund their retirement. The long term strategy to pay off any associated debt is also important to consider.
How much a property should appreciate over 10-plus years can be the subject of debate.
It is often suggested that a reasonable goal would be somewhere between four and seven percent above inflation. If average inflation is 3 per cent, then you would be hoping for long term capital growth of between 7% and 10%. These increases are however seldom linear and consistent. There can be quite a few peaks and troughs you need to contend with along the way.
Rents and property values generally grow, sometimes quickly and significantly, but they will also plateau at times, and can even decrease, depending on supply and demand and other broader economic factors.
In the times when the property market is not performing and your belief in the investment might be wavering, it can help to know the REAL cost of holding that property.
A real cost calculation highlights not only the obvious incomes and outgoings, but also factors in the tax benefits you receive when your property is making a loss that is recorded on your tax return.
This is commonly referred to as negative gearing.
This week, Deb spoke with clients who were feeling a bit frustrated about how much their rental property was costing them . They weren’t sure that keeping it was the right thing to do. The interest expense they paid monthly — and the quarterly bills that seemed to roll around so fast — were front of mind for them and felt like a drain.
Deb used information gathered to prepare their tax return and unpack it to show them the real cost of owning their rental property:
After tax benefits they were receiving $42 per week — a lot more affordable than it seemed when they didn’t have the full picture.
They also met with me to review their loans and were able to negotiate a lower interest rate and use the interest savings to start paying down the principal on the loans. This helped them build equity in the property faster.
Adding in the tax benefits and maximising their finance structure left them a lot more comfortable about the long term prospects of their investment.
Most rental property owners, especially in the early years, see the money they pay out on a monthly basis but only receive the tax benefit in a lump sum when they complete their tax returns.
For those on tight budgets, there is a way to receive that tax benefit throughout the year in the form of less tax from your weekly or fortnightly income. This is achieved via lodging an annual PAYG variation with the ATO.
After analysing the cost of holding your rental property investment, you may still decide that it is not for you – but at least you will be making the decision based on all the available facts.
For help analysing the real cost of your investment property, to have your finance reviewed, or to discuss whether you could benefit from a PAYG variation, call us on 07 3359 5244, email us at or reach us on Messenger below.