What to Budget for When you Buy an Investment Property

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What to Budget For When You Buy an Investment Property

An investment property can be a great medium- to- long- term strategy to build wealth.

One of the benefits of buying an investment property is that it doesn’t have to be your first pick as an area to live in or tick all of your lifestyle wants and needs. You have more freedom and choice in property type and location.

While an investment property can create good cashflow, it comes with a range of up-front, one-off and ongoing expenses which need to be considered when making the decision to invest.

Keep reading to learn about some of the costs involved in buying and maintaining an investment property that you may not have considered.

Up-Front Costs

Your Deposit

Typically you will need a 10 per cent deposit to secure a property but with higher interest rates and tightened lending criteria, you may find being able to commit to 20 per cent works to your advantage. Many lenders will also insist on 20 per cent in order to approve a loan. A loan of less than 80 per cent of the purchase price also means you avoid paying LMI – lender’s mortgage insurance.

Lender’s Mortgage Insurance

This type of insurance is designed to protect your lender from financial loss if you default on your mortgage repayments.

If you default on your loan and the bank sells your property – and the sale price is less than the value of your unpaid mortgage -your lender can make a claim on the LMI policy to make up the difference.

Stamp Duty

Stamp duty is the biggest up-front cost you will pay when buying an investment property – after your deposit.

The amount you will pay will depend on the purchase price of your property, whether you have bought a property before, whether you intend to live in it or rent it out.

You can calculate the amount of stamp duty you are likely to pay here

Lender’s Fees-loan Application and Documentation Fees

There may be a range of fees and charges you encounter when you take out a mortgage.

Many lenders charge a loan establishment fee (also called a set-up fee) when your loan is approved. You can ask your lender to waive this fee or look for a lender who doesn’t charge at all. You may also be charged a separate document preparation fee. Your bank may also arrange a property valuation to ensure that the value of your home matches the amount you are seeking to borrow.

Conveyancer’s Fees

Having a conveyancer or solicitor prepare your contract and other legal documentation is a necessity -preparing these forms yourself is not recommended. Conveyancer fees usually run to around $1000-$1500.

Building and Pest Inspection

Budget for this while still in the house-hunting stage –it’s an important outlay to make sure you are buying a property without any serious defects or problems – something which can become very costly down the road.

Depending on the length of your property search, it’s possible you may need to pay for more than one building inspection.

A combined building and pest inspection will cost between $500 and $1000.  Make sure your pest inspector is properly registered and licensed and your building inspector has sufficient industry experience to identify all defects.

Tax depreciation schedule

This is a good idea regardless of the age of the property you buy as an investment. A tax depreciation schedule is a document detailing how much depreciation you can claim on your investment on an annual basis.  This report should only be prepared by a qualified quantity surveyor.  A tax depreciation schedule prepared by a professional quantity surveyor will cost between $500 and $600.

Ongoing Costs

Offset or redraw fees

An offset is a bank account linked to your home loan – you use it just like an ordinary bank account. Any funds in your account are used to offset the balance of your home loan, thus reducing the amount of interest you pay.

A redraw facility is a feature of your mortgage – you can make extra repayments into your home loan and withdraw the money when you need it. The higher the extra repayments, the less interest you pay.

Some lending institutions levy extra fees and charges for these facilities – some may charge a higher interest rate for the privilege of an offset account.

Check if this is the case before you sign any home loan documents.

Property Management Fees

If you have decided to hand your investment property over to a property management company, then you will pay a commission on the rent you receive. This can range from 5-10 per cent depending on the agency.

Ongoing Upkeep and Maintenance Costs

As a landlord, the cost of maintaining and repairing your property falls to you. This includes utilities, rates, strata fees, house insurance, repairing and replacing fixtures and fittings and keeping the property in good nick with things such as painting, gutter cleaning and fence maintenance.

You are also responsible for any emergency repairs or fixes that may affect your tenant.

The cost of these expenses will vary – many of these can be claimed as a tax deduction under the process of negative gearing.

Other Expenses

If you are relying on your tenant to help you pay the mortgage on your investment property, you may find things expensive if there is a break between tenants – you may find yourself having to cover two mortgages until your next tenant comes along.

How can the Home Inspection Hub help property investors?

Whether you are entering the investment market with a new home, an established home, off the plan or an apartment or unit, we can help.

We are the residential inspection professionals.

We conduct a range of inspections throughout Melbourne, Geelong and Central Victoria:

  • Pre-Purchase House Inspections
  • Building and Pest Inspections with Crunch Pest Control
  • New Home Construction Inspections – all stages as well as Contract Review, Stand-Alone PCI and Maintenance Inspections
  • Owner Builder Defects (137b) Reports
  • Special Purpose Inspections
  • Renovation Inspections
  • VCAT Reports and Expert Witness
  • Tax Depreciation Schedules

We offer:

  • A free quote services
  • Free sample reports
  • Quick report turnaround

With over 25,000 inspections under our built and an established reputation, The Home Inspection Hub provides peace of mind for the biggest purchase you will ever make.

Call us today on 1300 071 283 or email info@thehomeinspectionhub.com.au and see how we can assist you in your investment property journey.