12 Expenses That You Can't Overlook When Calculating Your Outgoings
When you're calculating your potential profits from property investment, it's important to factor in all of your outgoings - including expenses that you may not have initially considered. By doing so, you can get a more accurate picture of the overall profitability of the investment.
There are some expenses that may not seem like much, but they can add up quickly. So, it's important to be aware of all the costs associated with owning* and operating a commercial property.
So, in this post, we will look at some of the most common expenses that investors should keep in mind - especially because they can make a big difference to your bottom line.
*Remember to check the terms of your lease agreement because, with commercial property, the owner or tenant can be responsible for paying some of the property’s outgoings.
1. Council Rates
Council rates are a type of property tax that the government uses to cover the cost of public or community services such as:
council operations,
community activities,
tree and bush management,
pest control, and
construction and maintenance of roads, bridges, kerbing, parks, gardens and council buildings.
When calculating how much each owner should pay, your local council will assess the land value of your property. The process involves estimating the ‘unimproved value’ of your land - which is the value without considering any of the buildings or structures on it.
Council rates are paid quarterly in advance. Some councils offer discounts for early payment, so it’s worth checking this.
2. Land Tax
Land tax is a state-based tax the investors have to pay on their investment properties. Owner-occupiers are exempt from paying tax on their principal place of residence.
Similar to the council rate calculation, land tax is determined according to the unimproved land value. If the total value is above the relevant threshold in the state or territory in which it is located, you’ll be required to pay land tax.
3. Property Management Fees
Property-management fees are charged by a real estate property manager for managing the property. Most property-management charges are based on a percentage of the gross rent, calculated on a tiered approach.
The fees can vary between 3.5% and 7% of the gross rent and are often quite negotiable. However, managers will generally charge a higher percentage on lower renting property because it still requires the same amount of work as a higher renting property.
For example, if you have a tenant paying $300,000 a year, the fee will be closer to 2%. But you have a tenant paying only $30,000 a year; you'll likely be paying closer to 7%.
Most property managers will expect to be paid $1,500 to $5,000 a year. Fortunately, however, these fees are tax-deductible (for the owner).
4. Water and Utility Rates
Water rates are paid to the authority that provides water and sewerage services to your property. The rates are paid quarterly in arrears and have two components:
a fixed amount for providing the water mains to the property, and
a variable amount based on your water usage.
On the other hand, utility rates include payment for electricity and gas - which is generally metered based on usage.
Both water and utility rates are usually the responsibility of the tenant, but this will depend on your lease stipulations.
5. Body Corporate Fees
The body corporate (or owners corporation as it is otherwise known) is responsible for managing the common property of a building or complex. The fees that you pay the body corporate cover a range of expenses such as:
building insurance for common areas,
maintenance of the common area,
shared utilities, and
building works or repairs.
Body corporate fees (once agreed upon by vote at the AGM) are calculated by adding the total amount required to maintain and manage the building for each year and dividing that among the owners depending on their proportion of ownership.
6. Insurance
Insurance is an important component of any risk management strategy because it protects the owner’s assets should any unexpected events occur. Owners should consider a range of insurance protection options, including:
Building insurance which covers the physical building against damage
Landlord insurance which covers the owner’s loss of rent should the property become uninhabitable after damage caused by a natural disaster
Public liability insurance which protects the owner from being sued if someone is injured on the property
7. Maintenance Costs
This outgoing should be a given because all properties require general maintenance. However, real estate agents often exclude this from their presentations because they are usually one-off costs. So, it is important that you incorporate these outgoings as part of your financial plan.
It’s worth noting that tenants are generally responsible for maintenance inside the premises but won’t necessarily cover large capital expenditures such as replacing an air-conditioning unit. Therefore, you will need to stipulate the tenant's maintenance responsibilities in the lease agreement.
8. Gardens and Landscaping
Depending on the size of the commercial complex, the gardening and landscaping outgoing may be a fairly low-cost feature or more extensive or elaborate and a lot more expensive to maintain. So, to avoid getting surprised by possible extra costs, it’s worth obtaining the gardener’s details to find out how much work is required and how much it will cost you to maintain each month.
9. Cleaning
Cleaning outgoing expenses are generally a tenant’s responsibility. And for the common areas of bigger commercial complexes, the body corporate will employ a third-party cleaning service and the costs will be included in the body corporate fees.
Cleaning fees could quickly and unexpectedly add up, so make sure to do sufficient research into a reputable service because getting the best value-for-money deal ,you can reduce outgoings for the tenant or owner.
10. Fire Inspections
Your commercial property must comply with the latest fire regulations - so you’ll need to factor this as a regular outgoing expense. Depending on the governing body and local council where your commercial property is located, you may have to do a fire inspection annually, biannually or quarterly.
To avoid getting additional penalties, you’ll need to stay on top of how often the fire inspection needs to be conducted.
Fire inspections are conducted by a third-party company and will include inspection of evacuation plans, exit signs, smoke detectors, extinguishers, fire hoses, fire hydrants, fire doors and building cladding compliance.
11. Backflow Prevention Testing
Backflow prevention devices are fitted to water pipes to prevent the reverse flow of potentially polluted water from a property back into the main supply. Local councils generally have inspection criteria that require property owners to have these devices annually tested by a licensed company
Similar to the fire inspection requirements, if you do not get these devices tested, you’ll be responsible for non-compliance penalties.
12. Rubbish Removal
If you weren’t already aware, the council does not provide rubbish removal at a commercial premises. In most cases, the tenant or the strata manager will organise rubbish removal. But it’s often a point of contention between tenants in a commercial complex. So, as the owner, you’ll need to monitor how much rubbish is removed as well as how often to avoid paying for a service that’s not required.
Key Takeaways
Commercial property owners should carefully track their outgoing expenses to ensure they are getting the most value for their properties. By understanding what costs are associated with owning and managing a property, business owners can make informed decisions about where to allocate their money in order to get the biggest return on investment.
If you would like to know more about how I have helped thousands of clients successfully source and purchase quality commercial property across the country, get in touch today.