The property market's strong performance in recent years has prompted many people to buy more properties as investments, the thinking being that they can benefit from rental income streams while they hold the properties and then achieve excellent capital gains when the time comes to sell.

There are indeed many attractive prospects in investment property. One problem, though, is that new investors often don’t budget properly for the ongoing costs of ownership, and thus tend to overestimate the income — or profit — that they will make.

Maintenance is vital

Keeping an investment property in good condition is vital, if you wish to retain tenants, and maintain your property’s value — especially in a low-interest rate environment that tempts more tenants to become homeowners and more developers to bring competing properties on to the market.

Consequently, prospective owners of investment properties need to budget for more than the monthly mortgage repayment and, perhaps, the community fees.

As a first step, owners should inspect their investment properties with “a critical eye” and try to anticipate what might need repairing or replacing in the next year. The roof may need to be waterproofed before the next rainy season, for example, or old guttering may need replacement. On the interior, the plumbing or wiring may need fixing, walls may need repainting and carpets need replacing.

Next, you need to get quotes for what all this will cost and budget for that expenditure spread over the next 12 months. You should also plan to put aside some funds for unexpected or emergency expenditure.

Bills, bills, bills...

Other ongoing costs that you may need to take into account are insurance and municipal rates, and if you own several investment properties, you should also budget for property management fees or maintenance staff wages and taxes, legal and book-keeping costs and advertising for tenants. To be safe, you should also factor in period when each property may be vacant.

It is only once you have totalled all these operating expenses and subtracted them from your projected rental income, that you will know the net operating income of your property. And if you then subtract your monthly mortgage payments and levies from this amount, you will be able to calculate the actual annual return on your money — the deposit you paid to acquire the property.