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 the Australian Bureau of Statistics (ABS), the combined values of dwellings in our capital cities surged almost 10 per cent in the 12 months to June 2015 alone. That means had you bought a rental property for $600,000 even just a year ago, you would have benefited from a price increase of around $60,000.

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:

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.

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.

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.

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.

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.

It’s a Good Time to be Investing

Property investing has created wealth for hundreds of thousands if not millions of Australians and has created countless millionaires over the past 30 years.

Although like any investment, property investment carries risks – numerous factors can affect the returns of your investment. Some of these include unemployment levels, state of the economy, interest rates and mortgage availability. You need to accept and prepare for these risks in order to be successful in property investing.

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