This article is general information only and does not constitute financial or tax advice. Consult a qualified tax professional for advice specific to your situation.
Key takeaways
- A typical $600,000 investment property with an interest-only loan can cost around $46,000 per year to hold, before accounting for rental income.
- Mortgage interest is the largest single cost. Only the interest portion is tax-deductible, not principal repayments.
- Budget 1 to 2 per cent of the property's value per year for repairs and maintenance, but expect costs to arrive unevenly.
- Most holding costs are tax-deductible, including council rates, water rates, insurance, and land tax.
- Depreciation is a non-cash deduction that can add $4,000 to $12,000 a year in tax savings without any additional spending.
Plenty of landlords know what they paid for their investment property. Far fewer know exactly what it costs them to hold it each year. That gap is where surprises live: an insurance renewal you forgot to budget for, a council rates notice that's gone up, a plumber called out on a Saturday night.
Before you can know whether a rental property is working for you financially, you need to understand what it actually costs to keep the lights on. Here is a realistic breakdown.
Mortgage Repayments
For most landlords, the mortgage is the single largest cost. The key distinction is whether your loan is interest-only or principal and interest (P&I).
Interest-only loans are common for investment properties because only the interest portion is tax-deductible; principal repayments are not. On a $480,000 investment loan at 6.5%, you'd be paying roughly $31,200 a year in interest. That full amount is deductible.
Principal and interest loans mean your repayments are higher, but you are reducing the loan balance each month. If your repayments are $36,000 a year, only the interest component (say $28,000 in the early years) is deductible. The principal portion builds equity but is not a tax deduction.
Which structure is right for you is a question for your accountant and mortgage broker, not something to decide based on a blog post. What matters for your records is that you know exactly how much interest you paid each financial year and can distinguish it from principal. Use the mortgage repayment calculator to compare interest-only and P&I repayments side by side.
Council Rates and Water
Council rates on a typical suburban investment property in a capital city range from roughly $1,200 to $2,500 a year depending on the council and the property's land value. Some councils charge significantly more.
Water rates (the fixed service charges billed by the water authority) add another $800 to $1,200 a year in most capital cities. If you pass water usage charges on to your tenants, those flow through your accounts but net out. The fixed access charges are yours to pay and to claim.
Both council rates and water rates are fully deductible in the year you pay them.
Landlord Insurance and Building Insurance
Building insurance for a standalone investment property typically runs $1,500 to $3,000 a year, depending on the property type, location, sum insured, and insurer. Strata properties have building insurance covered by the body corporate levy, so individual unit owners don't pay this separately.
Landlord insurance (which covers things like rent default, malicious damage by tenants, and liability) costs roughly $1,000 to $2,000 a year for a typical residential property. Both premiums are fully deductible.
For a detailed look at what landlord insurance actually covers and how to choose a policy, see our landlord insurance guide.
Strata and Body Corporate Fees
If your investment property is a unit or apartment, you pay strata levies (called body corporate fees in Queensland and some other states). These cover building insurance, common area maintenance, and building management.
Ordinary levies for a typical apartment might range from $3,000 to $8,000 a year in a mid-range complex. Older buildings with ongoing maintenance work can be significantly higher. Special levies for capital works (a new roof, lift replacement, waterproofing) can arrive with little warning and be substantial.
All regular strata levies are deductible. Special levies are generally also deductible if they are for maintenance rather than improvements. The distinction matters, so keep the minutes that explain what the levy covers.
Property Management Fees
If you use a property manager rather than self-managing, expect to pay 7-12% of gross weekly rent as an ongoing management fee, plus letting fees (usually one to two weeks' rent) each time a tenant changes.
On a property renting for $500 a week, a 9% management fee is around $2,340 a year. Add a let fee of one week's rent when a tenant vacates and you are looking at roughly $2,800 a year for a stable tenancy. All of it is deductible.
If you are self-managing, you save this cost but take on the work and the legal exposure. Most self-managing landlords still have occasional costs for advertising vacancies and tribunal fees if disputes arise.
Repairs and Maintenance
A widely used rule of thumb is to budget 1-2% of the property's value per year for repairs and maintenance. On a $600,000 property that is $6,000 to $12,000 a year.
In practice, it does not arrive evenly. You might have three quiet years followed by a year where the hot water system fails, a fence blows down, and you need to repaint after a tenant moves out. The budget is a long-run average, not an annual guarantee.
Routine repairs and maintenance are fully deductible. Capital improvements (adding something new, or substantially upgrading what was there) are depreciated over time rather than claimed immediately. For a clear explanation of where that line falls, see our guide to landlord expenses you can claim.
Land Tax
Depending on the state and the value of your land, you may also pay land tax. Victoria's threshold is relatively low at $300,000, which means many Melbourne investors are caught by it. NSW and Queensland have higher thresholds, but both still capture plenty of landlords, particularly those who have owned for a while and seen land values grow.
Land tax is fully deductible in the year you pay it. Use the land tax calculator to check your liability based on your state and land value. For a state-by-state breakdown of thresholds, rates, and how the deduction works, see our land tax guide for Australian landlords.
Depreciation: A Cost That Saves You Money
Depreciation is not a cash outgoing. It is a non-cash deduction that recognises the wear and tear on the building structure and the fixtures and fittings inside it. On a well-documented property, depreciation can add $4,000 to $12,000 a year in deductions without any additional spending.
It does not reduce your gross profit, but it does reduce your taxable income. For a property running close to breakeven, a solid depreciation schedule can make the difference between a small taxable gain and a tax loss that offsets income elsewhere. Try the depreciation calculator for a quick estimate of what you could claim.
Always confirm with your accountant what you are entitled to claim. The rules changed in 2017 for second-hand properties, and the right outcome depends on your specific situation.
A Realistic Annual Cost Example: $600K Property
To make this concrete, here is an illustrative breakdown for a $600,000 investment property with a $480,000 interest-only loan at 6.5%, self-managed, in a freestanding house with no strata.
| Cost | Estimated annual amount |
|---|---|
| Mortgage interest (6.5% on $480K) | $31,200 |
| Council rates | $1,800 |
| Water rates | $1,000 |
| Building insurance | $2,000 |
| Landlord insurance | $1,400 |
| Repairs and maintenance (1.5% of value) | $9,000 |
| Land tax (if applicable, varies by state) | $0-$3,000 |
| Total (excluding land tax) | $46,400 |
Against this, a property renting at $550 per week generates $28,600 a year in gross rental income. The shortfall of around $17,800 represents a negatively geared position, and with depreciation added, the taxable loss would be larger still. At the 37% marginal tax rate, that loss offsets roughly $6,600 in tax on other income. Use the negative gearing calculator to estimate the tax benefit for your own situation.
These are illustrative figures only, and costs vary considerably by property, location, and lender. The right numbers for your situation are the ones in your actual records. Use the savings calculator to see how propkt compares to the cost of a property manager.
Calculate Your Cash Flow
Plug in your own rental income and holding costs to see whether your property is cash-flow positive or negative.
Enter your weekly rent to calculate property cash flow.
Keep Track of It All in One Place
The challenge with rental property costs is that they arrive at different times, from different sources, in different amounts each year. A mortgage statement shows interest monthly. Council rates arrive quarterly. Insurance renews annually. The plumber sends an invoice whenever something breaks.
propkt lets you log every expense against the relevant property as it happens, with the correct category already set for tax purposes. At the end of the year you have a complete picture: income versus expenses, deductible costs broken out, ready to hand to your accountant without a last-minute dig through emails and bank statements.
Try propkt free for your first property and see exactly where your money is going.