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Costs to be aware of when buying investment property

There are various costs and fees associated with buying and owning property - from upfront legal and valuation fees to ongoing costs such as property management and council rates. And there are some costs that are specific to investment properties. Here is a helpful guide on what to expect.

Buying an investment property is a tried-and-tested way of growing wealth over the long term. But there are costs and fees attached to investing in real estate that go beyond just the deposit and repayments on your home loan, which you need to factor into your budget.

While a few may be optional – though still helpful to protect your long-term interests – some of them are non-negotiable.

Here’s a list of the various costs and fees you need to be prepared for when entering the property market in Australia. Some of these costs are specific to investment properties, while others apply to all property purchases.

Stamp duty

This is a tax calculated as a percentage of the property value when a property exchanges hands. It’s levied by state and territory governments, so all home buyers need to pay this. How much it works out to be will depend on the purchase price of course, but also on where you live. 

You can get an estimate of how much this cost might work out to be on a particular property with our stamp duty calculator.

Just remember, stamp duty can end up being quite a hefty chunk of money that you have to budget for, although you can talk to your lender about accounting for it in your mortgage. If you’re a first home buyer, you may be eligible for a partial or full exemption from stamp duty (also known as ‘transfer duty’).

Lenders Mortgage Insurance

If you have less than 20% of the property value to use as a deposit on your investment property loan, you may still be able to use it to buy a property if you’re open to paying lenders mortgage insurance (LMI).

LMI is an insurance premium that a borrower may choose to pay if their loan to value ratio is greater than 80%. It covers the lender for the risk of loss if the borrower is not able to make their repayment obligations and defaults on the home loan.

It’s important to know that you only need to pay LMI once. As with stamp duty, you can add it to your loan at the outset so it becomes part of the balance you pay off with your regular repayments.

Land Tax

This is an annual tax charged on investment properties by the state or territory government and is calculated on the basis of the ‘unimproved value’ – ie: how much the actual land is worth based on normal market value. There is a threshold amount set by the revenue office, and you only pay this property tax if the value of the land is above this.

It’s worth knowing that land tax is only payable on investment properties, not on a property that is your principal place of residence. You should also know that you should only need to pay either stamp duty or land tax, not both. This varies according to the state the property is in – you don’t need to pay land tax in NSW, for example.

A land tax valuation is usually done by the state or local council and the cost can range from a few hundred to thousands of dollars. It’s important to get a land tax clearance certificate before you buy a property – to protect you from getting stuck with any unpaid tax from the previous owner.

Legal fees

A property purchase can be a complex process with plenty of legal implications, so it’s a good idea to get a solicitor to help navigate the process of settlement. In fact, in some states, property investors are required to hire a solicitor for transactions.

A solicitor should not be confused with a conveyancer, although there is an overlap – ie: a solicitor can also offer conveyancing services.

Who is a conveyancer, then? A conveyancer is a qualified professional who specialises in property transfers. Conveyancers can prepare, review and lodge all the legal documents and help with managing all the various checks and due diligence that should be carried out before settlement, ensuring it complies with all regulatory requirements.

This includes things like carrying out a title search - to verify whether there is any outstanding debt on the property, because once it’s signed over to your name, you would inherit all the liabilities associated with the property – and the zoning regulations, which could impact the property value.

There are lots of little but important things that a conveyancer or solicitor will be able to guide you through. Getting help from the professionals will not only make managing all the paperwork easier, you may also benefit from their expert advice, which can protect your interests in the long term.

How much a conveyancer costs can vary quite a bit – anywhere from $500 to $1,500. This will depend on various factors including the type and location of the property, and how complex the sale is. 

Quantity surveyor 

This is a cost you might be glad to pay for – as it can translate into savings for you when filing your tax return with the ATO. A quantity surveyor helps with drawing up a depreciation schedule for your property, to work out what tax deductions you can claim on the rental property and its fixed contents. You should get a depreciation schedule drawn up professionally soon after the purchase.

This is a cost specific to investment properties only – as depreciation tax benefits cannot be claimed in a home you’re living in, since it’s not considered a source of income.

Pest and building reports

It is very important to carry out a professional inspection of the property by a licensed building inspector for structural soundness before you commit to a purchase – whether it’s for an investment property or for your own home. This is done to pre-empt the discovery of internal damage that may require expensive repairs soon after you’ve bought a house.

Older properties are generally more at risk of having underlying damage which an inspection report can uncover, and you should ideally get this done before you buy – or you need to ensure you have a cooling off period built into the contract, which lets you back out in case the report reveals something untoward.

Pest inspection is equally important, to check for potential termite infestation as well as other common pests. Many companies offer building and pest inspection as a joint package which makes it more cost efficient.

There are certain basics a building inspection will always cover, based on guidelines from Australian Standards, but you can get more detailed reports – and this may affect the cost. Factors such as the size of the property and where it’s located will also determine how much the building and pest inspections end up setting you back.

Mortgage registration fee 

Another government fee, this too varies depending on the state or territory. It’s a one-off payment that needs to be made when the home loan is established, to register the property which is mortgaged so there is a record for any future claims and transactions around this property. It’s quite a small cost compared to many others – under a couple of hundred dollars – but one that’s good to be aware of so there are no surprises.

Insurance costs 

While this isn’t a legally mandated cost, it’s important to get insurance – and most lenders require you to have it before granting full approval of your home loan. If you’re investing in an apartment or unit, this may covered in the strata costs and won’t be required by your lender.

Building insurance or homeowners insurance covers you for the actual property and its permanent fixtures (like cabinetry and plumbing, for example).

But as an investor, it’s smart to also get landlord insurance which protects you against risks associated with tenancy – the coverage ranges from loss of rental income to repairs for damage from both natural causes as well as by the tenant.

Maintenance costs

As a landlord, you are responsible for the upkeep of the property. So, whether it’s fixing a broken pipe or electrical fitting, or a regular paint job, maintenance and repairs are ongoing expenses you need to set aside money for.

There are certain things a tenant will need to take care of – such as replacing light bulbs while living on the property – but most repairs and maintenance falls on the property owner to manage.

Property management fees

This cost will apply only if you’re engaging a property agent, and will vary depending on how you’re using their services. From finding tenants to looking after the rental property on an ongoing basis – including managing the relationship with the tenant and maintenance – this can go as deep or as light as you like. And while the cost varies from agency to agency, it’s worth investing in a professional property manager to give you peace of mind.

Council rates

Once you’re a property owner, you are responsible for paying this tax on a regular basis, which covers the infrastructure and services provided by the local council - from waste collection and management to maintenance of parks and public spaces, roads and other support services.

Council rates are calculated on the basis of land value, and usually paid per annum. Bills for utilities like electricity and water rates based on usage are usually paid by the tenant, but the landlord may need to set it up in the first instance and pay for supply charges. 

Strata fees

If the property you’re buying is an apartment or townhouse, then you’ll probably also have to factor in strata fees or levies, which cover the upkeep of all the common areas in the building or complex. This can include anything from lobbies and lifts to gym, swimming pool and garden areas, as applicable.

This is also known as body corporate fees – body corporate being the commonly used term for the conglomerate of homeowners – and the fees will vary depending on the property and the amenities. 

Capital gains tax

This is a cost that will kick in only when the time comes to sell your investment property, but one that's good to plan for. It is calculated according to your income tax threshold, and is payable on how much the property cost has increased between buying and selling.

While this is a fairly comprehensive list of costs to look out for, over and above your home loan repayments, there are other optional ones too – such as paying for a buyer's agent or mortgage broker, should you choose to go down that route.

Many of these costs are tax deductible too, so keep that in mind when planning your budget and cash flow. It’s worth being prepared for the potential costs you can expect, so you can make informed decisions when planning your investment strategy.

 

Things you should know

This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice. Credit provided Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.

1. The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation.