Property Investing Basics - The Costs of Investing in Property
Understanding the Costs to Factor into your Budget
Have you been looking at the profitable property market and thinking you would like a slice of the rather fruitful pie?
According to CoreLogic, the median sales price of a home across the country rose to $474,500 as at June 2016, an increase of 4 per cent over the year. This means had you bought a property for $600,000 a year ago, you would have benefited from a price increase of around $23,750.
Given that the ABS states the average annual full-time adult income is near $80,000, that is a fairly substantial secondary income!
Property Council of Australia Executive Director Residential Nick Proud believes that regardless of the recent significant growth, the industry is looking steady for future home buyers and investors.
"New housing finance is still creating a reasonable supply pipeline for Australians and seems set to continue to underpin building commencements at elevated levels," he said.
However, before you rush off to make a financial commitment, it's important that you're aware of all the costs of investing in property. Here's just a few of the main expenses that you need to factor into your budget.
The Price Tag
The most obvious expense can also be the most deceptive. The Australian Securities and Investments Commission (ASIC) affirms that one of the most common mistakes made by first-time investors is over-committing themselves to an investment because they're unaware of the hidden costs.
For instance, you may toil for ages saving a deposit, then allocate your entire nest egg to purchasing a rental property, being unaware of the various hidden costs behind the price tag. In light of this, the ASIC recommends always having some money kept in reserve for unforeseen circumstances.
Some of the costs that can surprise new investors include:
1. Mortgage fees:
There are a number of charges associated with taking out finance. For instance, ANZ states that most lenders charge an approval fee, usually around $600. Meanwhile, if you're borrowing more than 80 per cent of the home's value, often you will have to pay lenders mortgage insurance - normally a one-off payment at the commencement of your mortgage.
2. Stamp duty:
This differs from state to state. For example, a $600,000 property investment in Victoria would cost you around $30,000 in stamp duty, while New South Wales would be closer to $23,000 according to their relative Offices of State Revenue.
3. Pest and building reports:
While not compulsory, the Queensland Government recommends that you get these professional inspections done before you undertake any negotiations, as knowing exactly what you're getting into could give you additional bargaining power. The general cost is between $400 and $600.
4. Legal costs:
These cover the legal transferral of ownership (normally via a conveyancer or solicitor), and can vary depending on the type of property you purchase.
5. Strata Fees:
Once a seller hands their property over, you immediately inherit all of the attached council and strata fees.
While both owners of houses and units are obliged to pay council rates, it is only owners of units or apartments that will have to incur strata fees.
Strata fees cover the property’s grouped maintenance and building insurance fees and are collected by the building's owners' or manager. These fees are ongoing costs that will continue to absorb your finances, generally quarterly, even after your initial property purchase payment, so it’s important to incorporate these into your ongoing budget.
The scope of strata fees will vary considerably depending on the age of the building, facilities, and location but you should expect to pay around $70 to $80 for the lodgement of application.
The Costs of Owning a Property
The old adage "you have to spend money to make money" rings true in real estate. According to the ASIC, some of the ongoing costs of property ownership can include advertising for tenants, vacancies causing a lack of income, repairs, maintenance, council rates and insurance.
Employing the services of a property manager can be a smart investment, given that they will be able to take care of all of the above at a justifiable cost, allowing you to put your feet up. Furthermore, the Australian Taxation Office asserts that you can claim tax deductions on essentially any expense related to your rental property, including property agent fees and commissions. Click here for more on negative gearing