What costs do I need to consider when buying an investment property
By Advantage Property | 15th Dec 19
When starting a property portfolio, many first time investors are unaware of costs associated with purchasing, owning and then selling an investment property. Here we provide details some of the important costs you may not have planned for before making your next investment purchase.
Within Australia whenever a property purchase is made, stamp duty is applicable. These payments vary from state to state and are calculated on a sliding scale associated with the value of the property you are purchasing.
When purchasing a property, you will require representation and when you come to sell the property, you will require legal representation by either a conveyancer or solicitor for the preparation of your contract of sale and section 32 required by law within Victoria to sell a property. Your costs can vary between $600- $2,000 approximately for these services.
For those who don’t know, land tax is an annual tax issued on property owners in Victoria as of the 31st of December each year. There are exemptions applicable but for the most part you will be eligible to pay land tax on any property which is not deemed your primary place of residence. It is important to note land tax is calculated on the total taxable value of all property owned in Victoria (either solely or jointly).
Although you will not be living in the property you will be liable to pay all outgoings. These costs will vary from property to property but you will need to budget for annual water rates, council rates, owner’s corporation fees or building insurance. For your convenience, your Property Manager should be able manage these for you and pay these out of your rental income. You can choose to pay your rates and owners corporation fees yearly or quarterly so work out what will best work for you.
Property Management Fees and ongoing maintenance:
It is also important to factor in as an ongoing cost your property management fees and we always recommend to our clients to take out Landlord’s insurance to cover them for any accidental or deliberate damage caused by tenants. You will also need to remember to accommodate for any unforeseen costs such as repairs, damage or vacancy. It is your legal responsibility to have and maintain the smoke detectors in the property and for a minimal yearly cost this can be done on your behalf by a professional company. It is important to note your insurance may be invalid if these are not maintained in working order.
To secure a new tenant your Property Manager will require you to pay for advertising costs for the internet and potentially a board. You will also be required to pay a leasing fee which could range anywhere from 1 to 2.5 weeks rental. Should your current tenant decide to sign a new lease during their tenancy there will also be a re-leasing fee applicable and depending on the agency this could be a fixed cost or based on one to two weeks rental.
When you establish your loan there will be fees applicable which will differ depending on which lender you utilise. Some fees that you will be charged are mortgage registration fee, mortgage discharge fee, transfer / conveyance registration fee, annual package fees (should you be on a premier package). There may also be a fee to remove a caveat (if applicable). In total these fees could be anywhere between $1,500 - $2000.
This is probably one of the most obvious ongoing costs for owners being, your loan repayments. Again these can be paid weekly, fortnightly or monthly so consider what you feel will work best for your situation and what will be the easiest for you to manage. If you do not fix your interest rates make sure you accommodate for rate variance and that you can still meet your repayments if rates increase.
Capital Gains tax:
When you come to sell your investment property, you will be liable to pay Capital Gains Tax on your profit since purchase. If you hold the property for 12 months or more, you will receive a 50% discount, however if you sell the property in a shorter space of time you will be liable to pay tax on 100% of your profit. For example, if you sell an investment property that you’ve owned for less than 12 months and you make a $200,000 capital gain, you’ll pay tax on 50% being $100,000. This gain will be added to your taxable income and increase the tax that you pay.
When considering all the above mentioned costs, it is important to also accommodate for the fact that many of these costs can be claimed back against your income. So while you will have an initial out lay to carry, you will be entitled to a tax benefit either as a tax deduction or to reduce your capital gains tax when you sell.