A simple mistake investors can make when purchasing a property is underestimating the costs involved. First time investors often focus on finding the right property and saving the required deposit based on purchase price, unaware of the additional expenses of investing.
Depending on the circumstances, the additional expenses may require further funds to be saved / borrowed or possibly even mean the purchase cannot go ahead!
This blog discusses some of the additional expenses investors should be aware of and factor in when determining funds required to invest. Whilst most of these will be tax deductible, not all are eligible for an immediate write-off and still require funds upfront.
When purchasing an investment property Stamp / Transfer Duty is required to be paid to the State. Rates vary throughout Australia however represent a significant additional expense. E.g. in Queensland, the purchase of a $500,000 investment property would require Transfer Duty of approx. $15,925 to be paid to the Queensland Government.
Solicitor / Conveyancing Fees are incurred by smart investors who choose to engage the ‘experts’ to read over the contracts and ensure suitable protection for the investor. They can also conduct title research and attend to settlement appropriately.
Land Tax may come into play for investors, particularly if you have many properties in one state. Administered by individual States, the threshold varies across Australia. Diversifying properties across the country may mean you don’t have to pay this tax.
Engaging a qualified person to conduct a Building and Pest Inspection is an important part of any property purchase. This can help identify potential structural or pest issues that cannot easily be seen with the ‘untrained’ eye. Purchase contracts should be signed subject to a satisfactory report. The report can also provide further price negotiation depending on what is found and cost to fix.
A word of caution though, carefully read the fine print as to what the clause clovers. I have seen a contract where the clause could only be activated if active termites were found! Meaning if significant repairs were required the contract could not be void unless termites were active…
Speaking of ‘subject to’ clauses; it is worth mentioning that including a ‘subject to finance’ clause is wise. This can enable time for the lender to value the property and you to get your finances in order (of course having pre-approval should have been undertaken!).
Lenders valuations are usually conservative, however if your property valuation is much lower than asking price, you have some more information about the property you may have overlooked. The valuation could save you paying too much! You could also engage an Independent Valuer (at your cost) to give you a fair valuation of the property.
Insurances are another area not to be overlooked. Depending on the type of property, Building Insurance (with suitable Public Liability) may be required as well as Contents Insurance to cover fixtures and fittings. Investors may also choose to take out Landlords Insurance to cover tenant specific issues such as loss of rent.
If a minimal deposit is provided towards then loan, the lender may require Lenders Mortgage Insurance (LMI) be paid by the borrower on top of the loan. This can be quite expensive and provides insurance for the lender in case of default by borrower. Investors may deliberately incur LMI to build a portfolio quicker than saving the 20% per property.
Income Protection Insurance is often not thought of but should be part of any wealth creation strategy. What if you suddenly didn’t get paid for a while or were unable to work, how would you pay the bills? How would you keep your investments running without income? Investigate the best options for your individual circumstances.
There are many other factors that should be considered when costing an investment property, e.g. ongoing property management fees, interest rate changes; however the above are main upfront costs that can catch novice investors unawares….