To help you avoid nasty surprises, here are the main costs you will need to consider, along with some insight into how to manage and potentially minimise them.
This is the largest and most obvious cost of buying an investment property. You will need at least 10 per cent, but note that at this level you’ll also be paying mortgage insurance – a fee to the bank to insure your loan. Many people will try to save 20 per cent to avoid this. However, you have to ask yourself what the real cost is. If it’s going to take you two more years to save the extra 10 per cent, is it possible that the value of the property might increase by more than what you’re saving. Mortgage insurance might be around $10,000, so unless you can save the extra money in a few months, chances are you will be paying more for the property in total. If you are determined to get a larger deposit together, consider buying off-the-plan with a 10 per cent deposit and save the rest while the property is built. That way, you’ve locked in the price today but you pay tomorrow.
Just when you think you’re there with your 10 per cent deposit, out comes the hand of the government wanting a little bit more. Each state is different, but stamp duty can add tens of thousands to the deposit that you need to buy an investment property. Make sure you include this as part of your calculations because the real estate agent isn’t going to ask if you’ve got the stamp duty when they take your non-refundable deposit from you. Some states will periodically offer incentives on stamp duty for either new properties or first home owners, so do your research to see if there are any incentives for you. Most will require you to move into the property. However, in Victoria, you can save up to 90 per cent of the stamp duty if you buy a new property off-the-plan without any need to move into it.
This is an area that you don’t want to skimp on. While solicitors cannot advise if you’re making a good decision financially, they can stop you from buying a dud property. We’ve all heard of the purchaser who didn’t get what they thought they had paid for, and it’s highly likely that they skimped on sound legal representation. Solicitors will charge varying fees, so it’s possible to shop around for value but don’t skimp when you’re spending hundreds of thousands of dollars.
The $1,000 plus mortgage application fee is a thing of the past. However, there are still some mortgage fees that you’re going to have to stump up for during settlement which would be enough to catch a few people out. You’ve got documentation and mortgage registration fees. You might have to pay for valuations and lodgement fees. If you’re buying an investment property within an SMSF, you will have additional legal fees. Again, not all lenders have the same fees, so shop around and make sure you read the loan contract properly.
While over time your rent may cover most or all of the mortgage, it’s unlikely this will be the case for the first month or two. It might take you a few weeks to find a tenant and the first week of rent will probably be soaked up with fees. All up, it’s quite likely that you will be paying the first mortgage payment without any rental income, so make sure you keep this in mind.
Making the property rentable
You will probably need to find items like blinds or a dishwasher to get the property ready for renting. Depending on the size of the property, this could easily be in the thousands of dollars. In order to avoid this, try and get the vendor to leave the previous blinds there or if buying a new or off-the-plan property, see if you can negotiate getting blinds.
David Hancock, managing director, Binnari Property