On the surface, owning an investment property seems like a simple and effective way to earn an income and grow wealth. If you do your research and invest wisely, it can be exactly that.
But what some investors fail to realise is the amount of extra expenses involved in owning an investment property. From loan repayments and insurance to property management and strata fees, there’s a whole lot you need to take into account when buying an investment property.
- Deposit. If you want to avoid the cost of lenders mortgage insurance (LMI), you’ll usually need a deposit of 20% of the property’s value. Shop around and compare loans, as you may be able to find a mortgage with a loan-to-value ratio (LVR) of as high as 95%, meaning you'll need a smaller deposit.
- Home loan. In addition to repaying the principal amount you borrow, there are other costs associated with your loan. There are establishment and application costs to consider, as well as legal fees, valuation fees and monthly or annual fees. LMI can also be a costly expense if you have a deposit of less than 20%, and then there are the ongoing interest repayments on the amount you borrow. A range of other fees and charges may apply, so read the fine print before you sign up for a home loan.
- Purchase costs. There are other costs associated with the purchase that you’ll need to consider, such as stamp duty, the amount of which varies from state to state and is based on the price of the property. You’ll also need to consider the cost of the legal transfer of ownership ($650-$850), registration fees and the cost of a solicitor or conveyancer. Building and pest inspections will also need to be conducted before the sale of the property goes through, which could add $500-$1,000 to your expenses. Title searches are another added cost.
- Buyer’s agent fees. An increasing number of investors are using buyer’s agents to help them find and purchase the right property. If you choose to go down this route, you’ll need to factor your agent’s fees into calculations. As a general rule, buyer’s agents either charge a fee that is 1-2% of the property purchase price or a flat fee of between approximately $5,000 and $15,000.
- Insurance. Building insurance can protect your investment property against fire, storms, theft and a wide range of other risks, while Landlord Insurance provides cover if tenants damage your property or default on their rent. The cost of this type of cover is influenced by a range of factors, including the size of your property, the material used in its construction and where the property is located.
- Property management fees. You can manage your investment property yourself if you have the time and knowledge, but most people choose to employ a professional property manager to look after their investment home. Property managers perform duties such as sourcing and screening tenants, holding open houses, and organising any repair or maintenance tasks that need to be completed. As a general guide, expect to pay around 7-10% of your rent in property management fees.
- Repairs and maintenance. Over time, your property may need repairs. Taps will leak, fittings and fixtures will need to be replaced, and some features of the house or apartment will simply break down due to general wear and tear. You should be prepared to meet the cost of any repairs and maintenance that need to be carried out at the property. Plumbers, electricians, builders, and a range of other trades may need to be called upon to keep your property in tip-top shape. Repair and maintenance expenses are generally lower on newer properties as they are less likely to have parts break down.
- Strata fees. If you buy a townhouse or unit, you’ll have to pay ongoing body corporate fees. These fees cover the cost of building insurance and expenses associated with maintaining common areas, and they vary depending on the size and type of the building, where it’s located and its features. Don’t forget to examine the strata fees you’ll need to pay before you make the decision to buy a property.
- Council rates. Check with the local council to find out the average quarterly rates in the area for a property of the same size as yours. Factor this amount into your budget to help you calculate the potential return on your investment.
- Other costs. Depending on your individual circumstances, other costs you may need to consider include:
- Accountant’s fees to help you calculate rental income and expenses when filing your tax return
- Pest control expenses
- Costs incurred when a tenant moves out and you need to find a new one
- Renovation costs if your property is due for an upgrade to increase its ‘liveability’ and make it more attractive to prospective tenants
- Travel and accommodation expenses if you need to travel to inspect your property or oversee maintenance
- Land tax payable to the government on your investment property
- The cost of connecting all the utilities and services to your property for tenants
- Agents’ fees, legal fees, advertising costs and other expenses to ensure the property is in top condition
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How to keep costs down
- Know the stamp duty rates. The amount of stamp duty you need to pay depends on the property’s location and purchase price. If you can negotiate the price down to a cheaper stamp duty bracket, you could save yourself thousands of dollars. Investment properties are subject to different rates than owner-occupied properties.
- Compare buyer’s agents. If you decide to use a buyer’s agent to help you find the right property, shop around for one that offers a professional service at a competitive price.
- Research before you buy. Make sure you research the property market in the area where you plan to buy so you have a good idea of how much a property is worth. Paying too much for an investment can set you back before you’ve even started.
- Minimise home loan fees. Banks are notorious for slugging borrowers with a raft of hidden fees and charges on home loans. You can avoid paying unnecessary fees by being a savvy consumer and comparing a range of loans. Read the fine print to familiarise yourself with all the fees and charges that apply to a loan, and then choose the mortgage that only charges minimal fees. Ongoing fees, application fees, early repayment fees and the like can all be avoided if you shop around.
- Choose the right loan. If your loan allows you to make extra repayments at any time without incurring a penalty, it usually makes good financial sense to do so. Take advantage of low interest rates and start getting on top of paying off your debt straight away.
- Make extra loan repayments. One option that’s useful for many property investors is an interest-only home loan. As the name suggests, this loan allows you to make interest-only repayments (as opposed to principal and interest repayments) for a set period. This allows you to keep your monthly repayments down and also claim interest payments as a tax deduction. Another option worth considering is a line of credit loan, which allows you to take advantage of the equity you have built up in a property you already own.
- Shop around for a property manager. The fees charged by property managers can vary substantially and make a big difference to your bottom line, so comparing the costs of several managers is a sensible approach. The cheapest property manager is usually not the best property manager, and you need to be sure that you will get all the services you want.
- Save a larger deposit. If you save up a deposit of more than 20% of the property’s purchase price, you can avoid having to take out lenders mortgage insurance (LMI). Not only will you be closer to the prospect of owning the property outright, you’ll also save thousands of dollars.
- Compare insurance policies. We’ve gathered a huge amount of information for you on building and landlord insurance policies from Australia’s most trusted insurance companies. Start comparing policies today to find one that offers all the insurance you need at an affordable price.
- Negative gearing. If the cost of your investment exceeds the income it generates, Australian tax law allows you to deduct your property investment expenses from your overall income. This is known as negative gearing and it can help make your investment a more tax beneficial proposition.
- Employ an accountant. Enlisting help from an accountant will ensure the best possible outcome at tax time. From negative gearing to capital gains tax, your accountant will know all the ins and outs of Australian tax law and will be able to take all the necessary steps to minimise the amount of tax you pay. The savings your accountant can generate will more than make up for the cost of the service.
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