How to invest in real estate without affecting your lifestyle: Eight techniques for slashing expenses

Most investors buy property as a means to securing a better financial future, but sometimes our future comes at the expense of our current lifestyle.

But there are ways to minimise investing expenses so you can still indulge in dinners out, a gym membership and even the occasional holiday abroad.

1. Choose a property priced within your means

Living “within your means” is defined as spending no more than the amount you earn, so that you don’t need to rely on credit cards, loan sharks or the good will of family and friends to pay your bills. And it will probably never be more important to pay heed to your ability to live within your means than when it comes to buying an investment property.

Overspend and your lifestyle may well take a hit.

“The more you spend, assuming you are borrowing most of the funds, the more those interest costs are going to be, the worse your cash-flow will be,” says Adviseable’s Kate Hill.

A buyer’s agent and property investment adviser across multiple Australian states, Hill says investors need to be realistic about what a property will cost to hold.

“It’s best to pay as little as possible to ensure that your biggest expense isn’t bigger than it needs to be,” she says. “You don’t want to be in a situation where you can’t sleep at night because it’s costing so much.”

2. Avoid high strata levies

If you’re buying an apartment, one of the biggest expenses are the strata levies, also known as body corporate fees. Generally speaking, the more amenities a building or development offers, the higher the strata levies will be.

Older, smaller blocks of units typically come with lower levies than their big, glamorous counterparts.

A quick look on Domain reveals a two-bedroom, one-bathroom, one-garage apartment in an older block of 18 in Lilyfield has quarterly levies of $659. The same-sized unit in a 400-apartment development in Westmead, with multiple lifts, a pool, spa, gym and tennis court, has quarterly levies of $1646.

“Many people see themselves living there, and think how much they’d love having all those amenities, but they’re money pits and you won’t love it when you get the strata bill,” says Hill.

“You need to detach yourself emotionally and take a cold hard look at the figures.”

3. Negotiate a low interest rate on your loan

Unless you own a property outright, interest is by far your biggest expense on an investment property so it offers the biggest scope for savings.

While negotiating with banks on investment loans has been more difficult in recent years, director of Mortgage Port Glenn Spratt says there’s good news ahead with APRA restrictions being wound back.

“Banks now have more capacity to lend in the investment loan area, so it’s time to shop around,” he says. “Make sure you include non-bank lenders on your shopping list.”

Spratt says when the restrictions were originally imposed, the banks increased interest rates on all existing investment and interest-only loans, not just new loans, so if your rates increased it’s time to look at refinancing.

Mint360 Property director Craig Sewell says approaching your lender for a better rate is becoming more and more prudent with the Reserve Bank’s move to cut the official cash rate.

Hill suggests putting a note in your diary to hassle your broker once a year to ensure you are on the best available rate.

4. Choose an interest-only loan instead of principal-and-interest

Spratt advises property investors to select an interest-only loan unless there is a good reason not to.

“If you still have a home loan, your priority should be to repay this loan before you bother paying down your investment loan,” he says.

“The investment loan is tax deductible so the after-tax cost of that loan is usually much lower than your home loan, even though the interest rate might be higher. Try and work out the after-tax cost of your loans and get some accounting help if needed.”

Spratt says investors should also scour the fine print of their loan offer documents carefully to look for fees.

“Many home loan fees are hidden and only come to light when a borrower wants to change their loan,” he says. “When choosing a loan, it’s important to work out the real cost of a loan after you take into account all loan fees.”

5. Use an offset account

If you pay all your income into an account that offsets your investment property loan, you’ll reduce the interest payable for the period the money stays in the bank.

“You can park surplus cash in your offset account without accidentally repaying tax deductible debt, but you still get to save paying the bank interest,” says Spratt.

“So when you need to use that surplus money to buy a car or go on a holiday, you can do so without fearing you have messed up your tax deductible loan and you can continue claiming all the interest on your investment loan as a tax deduction.” 

6. Choose a proactive property manager

The right property manager can make the world of difference to both the cost of holding an investment property and any associated stress.

A good property manager will choose tenants who will look after your property and hopefully stay for the long term which avoids frequent letting fees.

They will also help you stay on top of maintenance so that wear and tear doesn’t turn into an expensive large-scale repair or scare tenants away, and will raise the rent when the market allows.

“You’ve got to be able to trust your agent,” says Sewell. “There are a lot of really good property managers out there but also a lot of not-so good managers.”

While it’s important to ask about fees, Sewell and Hill both agree the cheapest isn’t necessarily the best.

“I recommend you don’t try to screw them down too much,” says Hill. “If you pay peanuts, you’re going to get monkeys, so pay a good rate and that will save you money in the long run.”

Standard rates vary from state to state, starting from around 5 per cent in the eastern states and rising as high as 10 per cent in Western Australia.

Hill advises investors to choose a senior manager “who has been around for a while” and operates from within the area your property is located.

She also recommends having a clause in your management agreement that allows 30 days’ notice to cancel the contract, so if the manager proves incompetent you can move on quickly.

If a manager is adept at keeping the lines of communication open so that you’re regularly informed about the property’s condition, you’re likely to be in good hands.

Sewell provides a great tip to minimise vacancies: structure your lease agreement so that the lease finishes during the seasonal up-swing in rental demand – usually January to March each year as people change jobs and schools. Drawing up a 14-month lease can carry the tenant over to the following year’s peak demand period.

7. Manage the property yourself

If you feel like property management fees are taking too big a bite out of your rental income, you may decide to manage the property yourself. This will only save you money if the time you spend on it doesn’t eat into your own income-earning time.

According to ASIC’s MoneySmart, if you manage the property yourself you will have to do everything from showing the property to tenants to collecting rent and organising repairs. You also need to comply with landlord regulations.

8. Shop around for landlord’s insurance

You’re wise to invest in insurance to protect you if your tenant damages the property, or if they leave without paying the rent. MoneySmart advises the cost of landlord insurance is tax deductible and it’s another product you can shop around for.

“Don’t just go with the big insurers,” says Hill. “There are some really good deals out there, but be very mindful that the policy covers you for all the eventualities you need. And the more you’re willing to put towards the excess, the cheaper the premium will be.”