Q: I am planning to buy an investment property and have saved up a deposit, but I know there are more costs to consider. What other investment property costs should I be aware of?
A: Property investment can be a great way to build wealth but you are right in thinking that there are more investment property costs than simply laying down a deposit.
Along with one-off purchase costs there will be ongoing expenses that you need to factor in when owning, managing and maintaining an investment property.
One off costs to buying an investment property
- Deposit: This amount depends on the price of the property and how much you want to put into it up front, but it should be at least 5% of the purchase price.
- Stamp duty: Based on a percentage of the purchase price, stamp duty varies from state to state. Stamp duty calculators can help you work out what you’ll be up for.
- Lenders mortgage insurance (LMI): If you borrow more than 80% of the property’s value you will need to pay LMI. There are ways to save on LMI so make sure you get some advice. LMI can usually be included with your loan or paid up front.
- Legal / conveyancing fees: This can add up to a few thousand dollars and will include things like the legal transfer of ownership of the property, contract of sale negotiations and changes and settlement.
- Mortgage or loan establishment fees: Some lenders charge an establishment fee so make sure you know what will be charged.
- Pest and building inspection reports: Part of your due diligence, it’s important to know exactly what you’re buying.
- Utility connections: Once the property is yours you will need to pay to set up utilities like water, gas and electricity.
Ongoing costs of owning an investment property
- Council and water rates: These are your costs and not something you can pass on to your tenants.
- Land tax: Not payable on your principle place of residence but it is payable on investment properties. Land tax varies by state and territory so you will need to check with your state revenue office.
- Strata levies: If you’ve bought an apartment instead of a house you will need to factor in regular strata payments.
- Insurance: Protecting your assets is important, especially with tenants, so you need to also factor in home/building and landlords insurance.
- Mortgage repayments: Depending if you are positively or negatively geared, your rental income may or may not cover your mortgage repayments. Any possible shortfall should be factored into your costs as well as any periods when the property is empty.
- Property maintenance: You will need to cover repairs which may be a lot or a little depending on the age of the property.
- Property management: You can manage the property yourself but many enlist the services of an expert. So if you decide to use a property manager you will need to factor in their fees, as well as costs to advertise the property.
Many property investment costs can be tax deductible, and there are ways to get into property investment on a small budget, so I hope this long list of costs hasn’t put you off. I recommend you see an accountant to better understand how it all works, including the tax benefits.
At least you are asking the right questions now because it’s important to work out all the potential costs to make sure it’s affordable.
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