How to be financially prepared for investment property related expenses

If you thought that cost associated with purchasing a property ended on settlement day, you're in for a surprise! When you own property, it requires an ongoing input of cash – and sometimes it's when you least expect it.

On the positive, if you have bought well, the property will also deliver more than enough capital growth to make up for the expenses along the way.

When the property is an investment, the key is to make sure that you have the cash flow to hold your portfolio over the many years that it takes for the magic of capital growth to work.

So, to ensure that you don't get blindsided by unexpected expenses, open a emergency funds account for each investment property you own and allocate 10% of weekly rent to this account while you hold the property.

After the first 12 months of your ownership, there should be enough funds to see you through any sudden expenses relating to your investment. Here’s five possible financial burdens that you'll encounter when you invest in property.

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1. Vacancies

No one wants a vacant rental property on their hands but it can and does happen. Why is that?

Well, there's often a period of time between when one tenant shifts out and the next one shifts in. During that period – that's right – there will be no rent coming in to help pay the mortgage.

Also, in soft rental market conditions – which you will potentially experience during the course of your property ownership – you may have a vacant property for a few weeks, if not a month or two.

Apart from ensuring that you are charging rent that meets the current market conditions and that your property is looking the best that it can, there’s not much you can do about a soft market.

That's why it's vital to have a financial buffer from day one.

2. Maintenance and repairs

As the saying goes, land appreciates and buildings depreciate.

In fact, buildings will someday become obsolete because, while they're built to last several lifetimes, they're not meant to last forever.

The way that you slow down your property's aging process is to keep up with all maintenance and repairs.

If you intend to hold the property long-term, be proactive with the updates, replace carpets and window coverings once they start looking worn in, to ensure that your property is in tip-top shape and will attract quality tenants more easily as well as make it easier to ask for rent on the higher end.

Of course, maintenance and repairs cost money – and sometimes there are emergency repairs which need to remedied immediately and your emergency funds should come handy.

3. Owners corporation or body corporate fees

In Australia, the number of people living in units, villas and townhouses is increasing every year as our population grows, renters are attracted to inner city suburbans hubs for lifestyle reasons.

If you buy of a strata-titled property, you will also belong to the complex's owner’s corporation or body corporate. Every quarter, each owner pays an administration fees to the company that manages the scheme.

Unit owners also have to fork out money for the scheme's sinking fund, which is used to pay for the upkeep of the building as well as other expenses.

The costs of these fees can vary widely depending on the age of the building, but $1,500 a quarter is probably about average. Remember, council rates and water charges are additional to your body corporation levy.

4.  Insurance

For owners in strata buildings, your body corporation fees includes building insurance premiums, however if your investment property is classed as a free hold dwelling, you'll need to stump up for building insurance yourself.

Other insurances that you'll need to pay for include landlord's insurance, which covers you for such things as malicious damage by tenants or visitors as well as loss of rent.

The premiums for landlord insurance can vary significantly between providers so make sure you get at least 3 different quotes before deciding on the right provider based on your individual circumstances.

5. Property management fees

Unless you are semi-retired and have time to burn, it's always a good idea to get a professional to manage your investment properties.

That's because property managers are aware of all the relevant legislation that regulates the rental market.

Plus, it's always wise to keep a business relationship with your tenants, which many private landlords struggle to do.

Like any professional service, however, there are fees to pay for property management. The first one is a percentage commission of the weekly rent to manage the property on your behalf, this can vary between 6-9 percent, depending on agency. The second and third expenses are lease renewal and letting fees.

If you have a long-term tenant, but one who only signs a six-month lease, then you'll have to pay for the property manager to renew the lease every six months. And that can be about half or one week's rent.

That's one of the reasons why it's a good idea to have 12-month leases on your investment properties – unless you're considering selling and want to sell as vacant.

Also, if your tenant moves out, then you'll need to pay one- or two-week’s rent for your property manager to re-let your property.

All of these fees are appropriate for professional property management and will ultimately save you money in the long-run. You just need to be aware of them so you're not caught financially short.

In summary

Strategically bought properties should grow in value significantly over the years that you own them. But that doesn't mean that you won't have to put your hand in your pocket from time to time to hold them.

The key is to make sure that you have a financial buffer in place to make those expenses as pain-free as possible.

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This article via does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.