The real costs of Investing in Real Estate
As with owning any property, there are costs associated with investment properties.
Making sure you understand these is important as they will have a direct effect on your budget and your overall net profit. While some of these expenses can be claimed not all of them can, so discuss each of them with your accountant or financial advisor.
1. Property purchase costs
This is the most obvious of all costs, but make sure when you are setting your budget you don’t spend all your budget on the property purchase as there are many other hidden costs you need to be aware of
As you have likely taken out a loan to purchase your investment property, you are going to be charged interest on that loan. Talk to your lender to work out what this is and the best option for you.
3. Mortgage fees
There are a number of charges associated with taking out finance. For instance if you are borrowing more than 80% of the home’s value you may be asked to pay extra charges such as lenders mortgage insurance - this is normally a one-off payment at the commencement of your mortgage. The cost of LMI will vary depending on how much you borrow and the type of loan you select but it will be approximately $10,000. Talk to your lender about any other charges they have.
4. Bank Fees
A lot of lenders charge an annual fee. This is an ongoing expense that you need to take into account. It normally isn’t a lot of money but still important to know exactly what you are up for.
5. Stamp duty
Stamp duty is a charge that is applied to the sale of residential property by state governments. It is not a fixed cost across the country - it differs in each state and territory and to find out the costs where you are read our state and territory specific articles.
The cost is usually calculated based on the price of the home you purchase, but each state has its own system.
The rate often differs depending on several factors:
- Whether you are purchasing vacant land or a brand new house
- If you are using the home as your main place of residence
It can be complicated to work out stamp duty on your own, as there are many rates that apply to different house prices. Consult an online calculator to help you determine the cost.
6. Pest, building and Strata reports
While not compulsory, it is recommended that you get these professional inspections done before you undertake any negotiations, as knowing exactly what you're getting into could give you additional bargaining power. The general cost is between $400 and $600 for a pest and building report and approximately $200 for a strata report
7. Legal costs
Buying an investment property s fundamentally a legal process so the help of legal experts, namely conveyancers and solicitors is critical. They will be an invaluable part of property negotiations and can help you through the paperwork. However remember they will charge a fee so make sure you factor this in. Some conveyancers will charge a flat fee while others will charge a sliding fee based on the properties sale price. Make sure you discuss fees and charges before you engage their services.
8. Strata Fees
Once a seller hands their property over, you immediately inherit all of the attached council and strata fees.
While both owners of houses and units are obliged to pay council rates, it is only owners of units or apartments that will have to incur strata fees.
Strata fees cover the property’s grouped maintenance and building insurance fees and are collected by the building's owners' or manager. These fees are ongoing costs that will continue to absorb your finances, generally quarterly, even after your initial property purchase payment, so it’s important to incorporate these into your ongoing budget.
The scope of strata fees will vary considerably depending on the age of the building, facilities, and location but you should expect to pay around $70 to $80 for the lodgement of application.
9. Property management fees
A property manager costs approximately 7-10% of your total rental income, however the services and expertise offered by a good property manager is worth much much more than this fee, plus in many cases the agents service fee is tax deductable.
10. Advertising for Tenants
You need to spend money to reach your future tenants. Your property manager will be able to advise you on how much this will cost but expect to pay approximately $600 to promote your rental property on top real estate portals and in the local newspapers.
11. General property maintenance
This is hard to guestimate as each property is different, but as a rule a property owner should allocate 2% of the property value annually for maintenance. Therefore if you a property is worth $400,000 the landlord should save a minimum $8000 for maintenance costs. Anything that ensures the property is livable for tenants is considered a maintenance cost
12. Council rates
No matter where you are in Australia you are going to have pay council rates to make sure the council can service you. These vary depending on the area so it’s a good idea to find out what they are. They are usually paid quarterly.
It is recommended that you take out landlord insurance to protect you from things like malicious damage caused by the tenants, a lack of rental income from tenants who have damaged the property or failed to pay rent etc. Terri Scheer insurance are experts in landlord insurance and can will provide a quote however expect to pay approximately $1500 annually for insurance.
14. Accountancy Fees
Your accountant will help you complete your tax returns and the end of the year, assess things like depreciation, rental income and expenses. They are a valuable resource in working out what you can and cannot claim. They will pull all of this together and help you lodge your tax return. Make sure you find out how much they will charge to manage your property investment accounting needs.