Property Holding Costs- By: Adam Pedley
In almost all countries around the world, there are costs associated with owning a property. These costs vary from country to country, state within the country and even district, county, or council. It is essential to understand these costs before purchasing a property for living in, or investment, as you must ensure you have enough cash flow to support these expenses.
Building and Contents Insurance
Insurance is compulsory if you take out a mortgage to finance the property. The banks want to see security on their money. Insurance varies again, even by suburb and is affected by, weather (possible cyclones, hurricanes, floods, earthquakes), crime statistics, distance from a fire hydrant, distance from emergency services etc. Yearly building insurance will cost hundreds per year, possibly thousands. I also recommend that contents insurance is taken out, so if the house is damaged any personal belonging can be replaced.
Possible strata or management fees if you live on shared land
If you live in apartments, units or another building that shares land, you will have to pay some form of fees, mainly for the management and maintenance of the land and shared utilities you may have.
If you borrowed money for the property you also need to take into account.
These are the costs most people focus on when purchasing a property. They are the highest cost when owning a property and must be taken notice of. When you take out a mortgage, effective the bank owns your property until you pay off the mortgage. If you default on your repayments, the bank can foreclose on your property, take possession of it, and sell it to make its money back. Find a mortgage calculator to determine the repayments you would need to make on your property.
And these costs are applicable if it is an investment property.
Management Fees / or Advertising, petrol etc if you are self managing.
If you have an investment property you must either manage it yourself or get a qualified property management agent to look after your property. Management fees vary per country, but it is usually around 10% of your gross rental income is taken as a fee. If you choose to manage yourself, take into account you need to spend money on petrol, driving to the house to inspect and advertising when you change tenants.
Many do forget, but you must continue to pay all these above property expenses even if your investment property is vacant. Ensure you calculate a small amount to put aside each week, so that it covers the above expenses when your investment property is vacant. Remember your property may become vacant for 1 - 2 weeks between tenants.
While tax benefits might help with the cash flow, it normally won't be applied until the end of the financial year, so make sure you can cover all the cash requirements until you receive the benefits.
Positive or even cash flow is essential when owning a home of your own. It is also wise to have reserve cash put aside incase you lose your job, your business doesn't make enough one month, or some of your investment properties are vacant. 6 months of living costs (so everything else, plus the above) should be saved up as soon as possible. Even putting $100 a week away will soon add up.
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