Hi all, I have been searching the internet for what would be the average percentage of ongoing costs of a residential investment property as compared to the income. Is more then 40% annual ongoing costs considered too high? Or is it more about the ROI? Cheers
Hi Anae,
After a bit of thought, I think this needs a heap more info before one could answer sensibly – here’s why…. First let’s put some numbers around this scenario – these are a guess, and maybe nowhere near your own numbers:-Example: You have a house worth $500k, with a mortgage of $400k, and Rental Income of $500/week ($26k pa). The mortgage is IO at 4%, so $16kpa – then add rates, Insurance, RE fees, (Body Corp?), Maintenance, etc and you would have to allow another $6k surely. Thus, income = $26k, and expenses of $22k, and you’ll see that expenses are thus 85% of income. Your figure of 40% looks pretty good at the moment!!
But then, are you doing an MHO-style investment (multiple tenancies in one house), where your rental is HUGELY increased? That could get you nearer – let’s say double the rental (it’s quite possible with MHO). The new figures then are :-
Example with MHO: You have a house worth $500k, with a mortgage of $400k, and Rental Income of $1000/week ($52k pa). The mortgage is IO at 4%, so $16kpa – then add rates, Insurance, RE fees, (Body Corp?), Maintenance, etc and you would have to allow another $6k surely. Thus, income = $52k, and expenses of $22k, and you’ll see that expenses are just 42% of income.
Other changes (cheaper house, or lower mortgage, or better rents) can affect these figures. But then, if you had a lower mortgage, it could also mean you have a lot of “lazy equity” in the property that might have been doing you better elsewhere. So in the end, it comes down to ALL the numbers and not just the expense to income ratio.
Wanna share some more numbers? We may be able to add some more relevant ideas (no advice, mind – but a good “talking point” for sharing ideas that might possibly work….). Great question by the way….
Benny
Thanks for the question, and you ask something that seems simple but is in fact very sophisticated and compelling.
Many properties have an ICR (Income Cost Ratio) which is negative (i.e. costs are higher than income), but that is due to their heavy leverage causing interest to be excessive. Other properties have higher hidden costs (such as body corporate, marketing, etc.). As such, operating (i.e. EBITA) rather than net income is the better base.
That said, getting an industry-wide number is difficult, because different people use different cost inclusions (because their definition of operating varies). Consider two properties – one externally managed, one internally managed. The ICR would be higher on the non-managed property, but the investment performance could be compromised because the management attention is lower.
All that said, for my US fund, we work on a gross margin of >60%. That is, operating expenses, including management, need to be contained at 40% of gross income or less.
Thanks again for the question. This is the best forum post I’ve read seen for a long time.
– Steve
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This reply was modified 5 years ago by
Steve McKnight.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
I think part of the key is what are you including as ongoing costs? The obvious big one is interest on loans but then add rates, water rates, insurances, agents commissions, accountants fees and the variables can be many. Maybe a better question may be what are the profits or losses each year on an investment. Just a thought.
Yes, that’s right. There is no ‘agreed’ industry-wide protocol for what expenses are included, and what are excluded, so the calculation cannot be applied comparatively with accuracy.
Heck – that’s a lot of big words in one sentence. Just had my morning coffee and it shows.
:-)
– Steve
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
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This reply was modified 5 years ago by
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