While the largest expense when buying an investment property is clearly the deposit, there may be more costs than you realise. If you’re not sufficiently informed, you could find yourself short at the worst possible time. To help you avoid any nasty surprises, here are the main costs that you’ll need to get together, along with some insight on how to manage and potentially minimise them.
The deposit
This is the largest and most obvious cost of buying an investment property. You’ll need at least 10 per cent, but note that at this level you’ll also be paying mortgage insurance – a fee to the bank to insure your loan. Many people will try to save 20 per cent to avoid this, however you have ask yourself what the real cost is. If it’s going to take you two more years to save the extra 10 per cent, is it possible that the value of the property might increase by more than what you’re saving. Mortgage insurance might be around $10,000, so unless you can save the extra money in a few months, chances are you’ll be paying more for the property in total. If you’re determined to get a larger deposit together, consider buying off the plan with a 10 per cent deposit and save the rest while the property is built. That way, you’ve locked in the price today and paying tomorrow.
Stamp duty
Just when you think you’re there with your 10 per cent deposit, out comes the hand of the government wanting a little bit more. Each state is different, but stamp duty can add tens of thousands to the deposit that you need to buy an investment property. Make sure you include this as part of your calculations, because the real estate agent isn’t going to ask if you’ve got the stamp duty when they take your non-refundable deposit off you. Some states will periodically offer incentives on stamp duty for either new properties or first home owners, so do your research to see if there are any incentives for you. Most will require you to move into the property, however in Victoria you can save up to 90 per cent of the stamp duty if you buy a new property off the plan without any need to move into it.
Legal fees
This is an area that you don’t want to skimp on. While solicitors can’t advise if you’re making a good decision financially, they can stop you from buying a dud property. We’ve all heard of the purchaser that didn’t get what they thought they had paid for, and it’s highly likely that they skimped on sound legal representation. Solicitors will charge varying fees, so it’s possible to shop around for value, but don’t skimp when you’re spending hundreds of thousands of dollars.
Mortgage fees
The $1,000 plus mortgage application fee is a thing of the past. However there are still some mortgage fees that you’re going to have to stump up with at settlement which would be enough to catch a few people out. You’ve got documentation and mortgage registration fees. You might have to pay for valuations and lodgement fees. If you’re buying an investment property within an SMSF, you’ve got additional legal fees. Again, not all lenders have the same fees, so shop around and make sure you read the loan contract properly.
Mortgage payments
While over time your rent may cover most or all of the mortgage, it’s unlikely this will be the case for the first month or two. It might take you a few weeks to find a tenant, and the first week of rent will probably be soaked up with fees. All up, it’s quite likely that you’ll be paying the first mortgage payment without any rental income, so make sure you keep this one up your sleeve.
Making the property rentable
It’s common that you’ll need to find items like blinds or a dishwasher to get the property ready for renting. Depending on the size of the property, this could easily be in the thousands of dollars. In order to avoid this, try and get the vendor to leave the previous blinds there, or if buying a new or off the plan property see if you can negotiate getting blinds.
Consistently ranked one of Sydney’s top financial planners (Adviser Ratings), Brenton helps his clients life a great life by making the most of their money. Read his full bio here.
