Investors, cover your costs

Investors, you should be aware of factoring in these costs.

As with any real estate purchase, there is a range of associated costs above and beyond the price of the property itself.

There are also some that are unique to investment properties.

As an investor, if you aren’t aware of them and don’t factor them into your planning, they can significantly slow down your plans or the viability of hanging onto your investment.

Stamp duty
The state government charge for stamp duty and associated Lands Title Office charges can represent about 4-5% (depending on the State you live in) of the property purchase price, but it is a cost that many investors overlook when doing their calculations.

On a $400,000 property there would be about $19,000 (depending on the State you live in) in these charges. Therefore, if $400,000 is your maximum budget, you would really need to look at a property that’s around $380,000 so you have the funds to cover these costs.

Lenders Mortgage Insurance (LMI)
If you borrow more than 80% of the property’s value, you’ll need to pay LMI, which can be costly. LMI covers the lender if you’re unable to meet your loan repayments – not you. If you were to borrow 90% of a $400,000 property, the LMI would be between $5000 and $8000, depending on the lender.

However, some investors who are looking to buy multiple properties are often quite happy to pay LMI.

Take the example of an investor who has $100,000 to put towards their property purchase. They could buy a $400,000 property and pay the $100,000 as a deposit, which would mean they would need a loan for the other 75% ($300,000) and wouldn’t have to pay LMI.

Alternatively, they could buy two $400,000 properties and put down a $50,000 deposit on each. They would be providing a deposit of 12.5% and borrowing 87.5%, which would mean they would have to pay LMI.

However, they would be getting the benefit of rental income and capital growth on two properties, rather than one.

Investors wanting to grow an extensive portfolio will want to make every dollar count to help buy the next property and will view LMI as a tax deductible way of doing that.

Bank fees and charges
Selecting a basic loan or a professional package as the way to purchase your investment property/ies should be determined by your investing plans. Basic loans are ‘no frills’ products that generally offer a lower interest rate with no or low monthly fees attached.  However, they do generally have an application fee associated with applying for a new home loan.

In comparison, professional packages are a way of packaging a loan with extra benefits, such as discounted interest rates and lower fees but generally have an annual fee attached.  There are normally no application fees.

Generally speaking, someone looking to have their family home and one investment property may be better off with a couple of basic loans, while someone looking to acquire multiple investment properties may benefit from a professional package.

You also need to be mindful of fixed loan break costs and loan exit costs if you decide to change loans at some stage or sell your investment property. These have the potential to total thousands.

Land taxes
These are state government taxes that apply in all states of Australia. This is a tax based on the Valuer-General’s valuation of the land component of your investment property – owner occupier properties are excluded.

The more investment properties you own, the higher the tax. This is a tax that has to be paid annually and needs to be factored into your ongoing costs.

Strata fees
If you buy a strata titled property – say in an apartment complex – you will be required to pay strata fees which cover costs such as insurance and maintenance. The more facilities the complex has, the higher your strata fees will be.  For example, an apartment complex with a pool, spa, gym and lifts will have considerably more expensive strata fees than a small block of units with none of these.

You might expect to pay something like $300-400 per quarter in a basic complex, but strata fees of $1000 or more per quarter in higher end developments are not unusual. That’s a real cost of $75 or more per week that needs to be factored in to your property holding costs.

Identify these costs to maximise returns
While these costs might be able to be claimed as tax deductions, they still need to be factored in and you still need to be able to afford and manage them.

Otherwise you could find yourself quite out-of-pocket in order to keep your investment property.

As always, talk to your Mortgage Broker for more information.