When thinking about budgets and borrowing capacity, the price tag on a property should not be your only consideration. Below is a summary of the various upfront costs involved in purchasing an investment property –
Deposit–The greater your deposit, the less you must borrow. Generally, you need a deposit of 10% for a new investment property. Paying less than 20% deposit will usually incur Lenders Mortgage Insurance (LMI, see below).
Stamp Duty–Stamp Duty is a government tax on property transactions that varies from state to state. Stamp Duty is calculated on a sliding scale and will vary depending on the value of the property, the type of property and the purchaser’s intent (i.e., will they be living in the property or renting it out?).
Legal Costs–Conveyancing is the process of transferring a property from one party to another and you will need a Solicitor or Conveyancer to coordinate the financial, administrative, and legal aspects of this process. While Conveyancers specialise in property transactions, solicitors generally have a broader legal knowledge and can assist with legal matters outside of a Conveyancer’s expertise including tax implications, court attendance, and more complex transactions that may pose more risks. In some states, such as QLD & ACT, it is a requirement that a Solicitor is appointed for all property transactions.
Loan Costs–There will also be fees involved in setting up a new mortgage, some of which include valuation costs, loan establishment fees, transfer fees, mortgage insurance, mortgage stamp duty, and search fees.
Lenders Mortgage Insurance (LMI)–Typically, if the amount borrowed is over 80% of the value of the property, Lenders will mitigate this risk by charging LMI, in case the purchaser is unable to make their mortgage payments. Many investors are willing to take on this additional cost as it is generally tax-deductible and may mean that they can get into the property market earlier with less of a deposit. There are a number of eligibility criteria that may allow you to waive LMI, including working in specific professions and being a high-income earner.
Investors Due Diligence–It is important to perform due diligence on an investment property to ensure it is free of any additional risks. It is recommended that a building and pest inspection be carried out on the property as well as any other environmental surveys and reports as per local planning guidelines.
Holding Costs–Holding Costs will vary depending on the type of investment property you purchase. Off-the-plan property incur the greatest holding costs as you need to allow 6-12 months for the land to register and the build to be completed. Holding costs are generally tax-deductible and include expenses incurred while the property is vacant such as council rates, land tax, utilities, insurance, strata levies (if applicable), maintenance, and interest.
As a rule of thumb, on a $500,000 investment property, you will need a 10% deposit and approx. $30,000 – $35,000 in additional costs, totaling $80,000 – $85,000. If you or your partnership have $80,000 or more saved up and are both working, you could be in the market for a good, safe, investment property.