While soaring rents in our capital cities and regions are well known, the rising costs associated with holding investment properties are rarely mentioned.
Since the beginning of 2020, rents in most capital cities have changed by roughly 10% per year. Rental growth is lower in Darwin, Canberra and Hobart, but these markets attract far fewer investors.
Significant increases in expenses are imposed on landlords, including land tax, council tax, water bills, maintenance fees, insurance, and property management fees. But the biggest increase in the cost is interest.
Australian property investors have experienced a sharp rise in costs over the past two years, and for many, the negative cash flow from holding investment property has forced them to either ** or consider**.
The question that needs to be addressed is: do rents** cover these additional costs, or are investors feeling more strapped for cash now than they were two years ago?
Land tax, council tax, and water charges all vary depending on the property, state, and region.
Some states have experienced changes to land tax thresholds (such as Victoria's 'Interim Covid Provisional Land Tax'), many of which have recently undergone significant changes.
In addition, as the value of capital grows and the state** reassesses the value of capital, many investors will find themselves eligible to pay higher land taxes. Similarly, when a local council reapplies for valuation, the municipal rate will be increased to reflect the higher unimproved property values in its jurisdiction.
Many may argue that maintenance costs are relatively stable, however, legislative changes to minimum rent standards, coupled with the introduction of mandatory compliance checks such as electricity and gas, have increased the average maintenance surcharge for investors.
Another added cost for investors is property management fees. The vast majority of property management companies charge a percentage of the total rent.
The management fees for each property increase as the rent increases. For example, for a $500 per week rental property, a 7% management fee is equivalent to $35 per week. For those properties that have rented 20% of the rent in the last two years**, the rent of $500 per week will increase to $600 per week, so the owner will pay $42 per week to the same property manager.
Directly related to inflationary pressures and environmental conditions, we must also consider the cost of insurance. Since the beginning of 2020, property-related insurance premiums** have increased by about 20%.
But the biggest increase was in mortgage repayments. Whether investors take out principal and interest loans, or interest-only loans, their interest costs are magnified.
In Australia, the average loan amount for investors is 61$90,000.
From March 2020 to May 2022, variable interest rates for standard loan products were typically less than 3% and, for many customers, less than 2%. During this period, many investors fixed loans at profitable interest rates.
A customer with an average loan size would need to pay $12,380 per year for a 2% interest-only loan and $27,455 per year for a 2% interest-only loan over a 30-year loan term.
In today's lending environment, the same investor would be between 6% and 6The 5% interest rate on the loan pays interest, depending on the lending institution.
Let's assume that there is a graph in the middle of this band; In the case of a principal and interest loan, the investor's mortgage repayment is $46 per year$950, or $38 if it's an interest-only loan687.$50.
The chart below shows the difference between mortgage rates and rental income prior to 2020 and the same level in 2024.
I assume that the average investor will be renting at **20%. Other assumptions include: In today's climate, the average rent is $600 per week, while the average rent is $495 per week. The annualized figures for both are 31$200 and $25740 USD.
Even taking into account the previously listed out-of-pocket expenses such as land tax, council tax, water bills, insurance, management fees, and maintenance fees, the out-of-pocket costs for investors are much higher today than they were four years ago.
One factor that investors can actively consider is the reduction in vacancy rates. Nowadays, rental housing is in high demand, and vacancy periods are getting shorter and shorter. If we pull back the memory to 2020 and 2021, some cities (particularly Melbourne) had high vacancy rates. The state has an eviction moratorium, and many landlords are facing lower rents (or zero rents) during this time.