There are 5 costs you should be prepared for when buying an investment property

Welcome to 2023!  If your New Years’ resolution was to buy an Investment Property this year, here are some tips that may help you.

Real estate investment has always been considered a relatively safe bet. But you have to be prepared to face some costs along the way

First-time buyers or new investors often don’t realize the total cost of buying and maintaining a property, ongoing costs can often be vastly underestimated when investors are doing their analysis – which can have a big negative impact if you need to spend $15,000 to replace the roof unexpectedly.

A large factor when doing your cash flow analysis is interest rates. It is wise to include a buffer should interest rates increase in the future.

Here are 5 costs that you need to be aware of before you start.

The deposit

You’re going to need a rather large deposit to get into the investment property market, particularly given that most lenders have tightened their lending criteria.

Lenders prefer that borrowers save 20 per cent of the home’s full value for a down payment or deposit.

It is still possible to get a loan with a smaller deposit, but you may have to take out lender’s mortgage insurance (LMI). This means that the property will also take longer to pay off or your repayments will be higher.

Lender’s mortgage insurance LMI is an insurance policy designed to protect the lender from financial loss if the borrower can’t afford to meet their home loan repayments.

So, if the borrower defaults on their loan and selling the property doesn’t cover the value of the mortgage, the lender can make a claim on the LMI policy to cover the difference.

Generally, all lenders insist on LMI if you have less than 20 per cent of the value of the property you’re purchasing as a deposit.

It’s not cheap, either. ANZ says it could cost over $10,000 on a home loan of $500,000 for which you’ve saved a $50,000 deposit.

So ensure that you have a 20% deposit or make an allowance for the LMI that will be applied.

Stamp duty

When you purchase an investment property, you are required to pay a state government tax called stamp duty. The stamp duty on property transactions varies depending on where you live and the value of the property you’ve bought, and needs to be paid soon after settlement.

In Queensland the rate of Stamp Duty for Investment properties is:-

Lender’s fees

The bank or lender you use will often charge a few different fees, depending on the number of loans that you are taking out.

These fees cover loan application and documentation fees, which are one-off payments, there could also be monthly loan service fees, depending on your lender or the type of loan that you have.

Other fees include offset or redraw fees on your loan balance, so understand the upfront and ongoing loan fees before signing on the dotted line.

We suggest that you speak with a mortgage broker that understands how to put together an appropriate loan structure for property investment purposes.

Building and Pest report

A building inspection is an important step in buying a property.  It can save you thousands of dollars by highlighting a property that you should not purchase or highlighting future maintenance issues that you will need to deal with in the future.

You’ll need to track down a licensed building inspector to visit the property and provide a full report outlining the findings. The will cost vary due to the type of property and the type of inspection you want to be done.

A Building and Pest Inspection for an average-sized home in the Brisbane area could be around $500 to $1000.

A professional pest-control report should also be included in your report, but you do need to ask for it.  This may also add to the quoted price, so be clear about what it is exactly they are going to do for you.

Property Management Fees

Putting your investment in the hands of a qualified property management team adds up, with fees ranging between 5 per cent and 12 per cent of your weekly rent, depending on the agent you use.

At Hicks Real Estate Property Management we can assist you in first finding the right investment property and then taking away all the stresses and pressure that investors that manage their own property feel.

Talk with David Watt about how we can assist you.

Other ongoing costs include council and water costs, insurance, repairs and maintenance and strata costs if your property is on a strata title.

The good news, of course, is that most of these costs can be used as a tax deduction and with depreciation, can assist you to pay a lot less tax at the end of the financial year, in the early years they may even provide you with a tax refund.