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What are holding costs for an investment property?
Holding costs are the ongoing costs of owning a property while you keep it. They can include loan interest, rates, insurance, upkeep, management fees, strata charges for shared property, and land tax. These costs cut the rent left for you. Many continue when the home is empty. A cash budget must also cover payments towards the loan debt.
Updated
Which ongoing expenses belong in a holding-cost budget?
The budget covers keeping the property, borrowing for it and running it. Common costs are council rates, water charges paid by the owner, insurance, interest, management and routine upkeep. Strata fees for shared property and land tax can apply too. The list depends on the property and who owns it.
Bills may come each year, each quarter or after a repair you did not expect. Turning a yearly total into a monthly amount shows an average cost. It does not shift the dates when bills are due. The budget also needs to show who pays. A bill the tenant pays is not by itself a cost for the owner.
What happens to holding costs when the property has no tenant?
Many bills keep coming when rent stops. An empty home still has a mortgage, council bill and insurance policy. Some costs change with how much the property is used. Others stay due under current contracts and the duties of ownership.
An empty rental and a home kept for private use have different tax treatment. Costs may still be claimable if the property is truly offered for rent on normal business terms. They must meet the deduction rules. Keeping it for private holidays or not truly offering it to tenants needs a different check of claims.
Why is an annual cash budget different from deductible rental expenses?
A cash budget counts money paid out, including payments towards the loan debt. Tax rules separate eligible running costs from spending on assets or improvements, and private use. Interest may be claimed when the borrowed money is used to earn income. Paying the debt back to the lender cannot be.
Replacing a whole asset or improving the building's structure can have different rules from fixing normal wear. Some claims are spread over years. Depreciation, a deduction for eligible building or asset costs over time, may need no cash payment that year. So a bank balance cannot take the place of the tax sums.
Illustrative example4 steps
A year's running costs before debt reduction and income tax
- Assume annual loan interest of $19,000, rates and insurance of $5,000, and management and maintenance of $4,000.
- Running costs: $19,000 plus $5,000 plus $4,000 = $28,000.
- With $33,000 in rent collected, the difference is $5,000 before principal repayments and tax.
- If the borrower also pays $7,000 towards principal, the cash result becomes $5,000 minus $7,000 = a $2,000 shortfall.
For investors
Gross rent does not show the money available to the owner.
Weekly rent in an ad shows only the income side of the budget. Running costs, empty weeks, debt payments and building work can change the cash left. Separate records for these parts make the rental result easier to read. They do not imply that every cash payment is deductible. Your registered tax agent or accountant can check the type of cost and split any private use.
Common questions
Questions about holding costs
Keep learning
Property is a complex world.
Holding costs is one piece of it. Taxes and duties decide what a property really costs to buy and to hold. Next, read about land tax, principal and interest loan and negative gearing.
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