It is important to be aware of all your investment property costs so you don’t get stung by hidden fees or expenses that you can’t afford to pay for. I have comprised a comprehensive lists of almost all the costs associated with buying and holding an investment property.
Owning a real estate is great, but only if you know what you’re doing. If you’re new to this, you might end up purchasing the wrong property for the wrong reasons, or you could earn money only to find out that it’s not enough to cover the investment property costs and then you have to sell the property before you have made any money.
Unfortunately, there’s more to it than getting tenants and receiving monthly rental payments.
Be Prepared: Know All the Fees, Payments And All The Costs Associated to Investment Property
First, let’s start with the initial investment property costs. These are mostly one-off expenses that you need to pay at the time of the sale.
Initial and Upfront Investment Property Costs
1. Deposit – You need to save a deposit before you can purchase a property. Banks prefer to lend up to 80% of the property price (meaning you need to save 20%) but some lenders will go as high as 95% (meaning you will need to save 5%)
2. Lender costs – This includes fees charged by banks and other lending companies to cover the costs they incurred while processing the loan, some people refer to this as administrative charges.
3. Mortgage application fee
4. Property Valuation Fee – Is paid for the services of a licensed Quantity surveyor or appraiser to assess the value of the property. A valuation is also needed when you want to refinance or use the equity of one property to finance the purchase of another. This is done for the banks to ensure you are not paying more than the property is worth.
5. Mortgage Insurance – You’ll only need to pay for this if you are loaning 80% or more of the property’s value.
6. Title search fees – It is always a good idea to do a search to ensure the person you are buying the property off is the person who actually has the title. Yes it is still possible to get stung by a fraud.
7. Stamp duty – This is a tax payable on the purchase of the property.
8. Loan establishment fees
9. Connection fees – is paid for the connection or installation of utilities; water, electricity and gas.
10. Legal fees – Payable to your solicitor to draw up the contract of sale and negotiate this contract11. Security deposit – Often a security deposit of 0.25% is paid upon the acceptance of your offer. This starts the cooling off period. If you decide not to purchase during this cooling off period you may lose your security deposit.
Fees Payable On The Sale Of Your Investment Property
12. Capital Gains Tax (CGT) – Will only be paid if you sell the property. This tax is mandatory and is the same as the income tax paid by the owner. Fortunately, if the owner of the property has held the property in question for more than a year, then he may be entitled to receive a 50% discount of the capital gains tax.
13. Discharge fee – Paid to cover the lender’s legal expenses, if any
14. Exit fee – Most property investors have never heard of such fees, they only hear of it once they’re charged by the bank. Exit fees vary per lender, in most cases, it’s only payable if the property was purchased with a fixed interest loan and the borrower paid off the loan earlier than expected, or sold the house before the loan was fully paid. Exit fees are usually charged to cover or recover loan incentives, rebates and other concessions the bank made when the loan was approved.
15. Legal fees – Payable to your solicitor for drawing up to contract of sale and making changes on your behalf.16. Sales Commission – Usually a percentage of the sale price of your property, paid to the real estate agent who sells the property for you. Usually 1-3% of the sale price17. Marketing Fees – Real estate agents will often charge you marketing fees on top of their commissions. This gets your property into online listings, magazine listings, brochures and other types of marketing (eg. Sign out the front)
Ongoing Investment Property Costs
This list includes all the investment property costs investors may have to pay while the property is under their name:
18. Land Tax – If you own large portions of land you may need to pay an extra tax as a result.
19. Council Rates and Government Taxes – Payable to the local council or government, usually for the upkeep of the local area and things such as bin collection.
20. Income Tax – If your property is positive geared you will likely need to pay tax on your earnings.
21. Mortgage payments – You will need to make your regular mortgage repayments to pay back the lender who gave you the loan.
22. Property management fees – this is only applicable if you’ve hired a real estate firm or property manager to oversee your rentals. The fees vary, depending on the firm’s reputation and the services provided by the property manager, but usually it’s 5% to 10% of the yearly rental income. They also often charge a fee of 110% of one weeks rent when they secure a new tenant for your property.
23. Advertising fees – Not every property owner pays for advertising. If you want to get more tenants though, be prepared to shell out $30 to $100 a month for online advertising in real estate websites and ad-listing sites. Newspaper and billboard ad rates are much more expensive, but you’ll have more chances of getting more qualified leads from there.
24. Legal fees – Legal expenses include the services of a solicitor and filing fees for small claims court and local tribunal. Don’t worry; you’ll only have to pay for such if a tenant doesn’t pay or if you have to evict them for other reasons.
25. Notarization and Documentation Fees – Includes the costs for drawing up legal documents and lease agreements
26. Accounting fees – If you use an accountant to help you complete your yearly tax return or any other work they do for you
27. Body corporate fees – If you own a unit or townhouse that shares common areas you have have to pay body corporate or ‘strata’ fees for the upkeep of the common areas.
28. Property Inspection Fee – The property to be leased needs to be inspected before a tenant occupies it, so the owner will have a detailed report of the property’s original condition. The report will list potential problems, such as cracked walls, broken heaters, or plumbing. The details of this report should be used to repair the property (if needed) and to make sure that the new tenant leaves the property as is when his contract ends. When the tenant leaves and there’s a damage not recorded in the property inspection, the owner may use this to deduct reasonable fees to the tenant’s down payment. Not all agents charge this fee as an extra, for many it is a part of their service.
29. Travel expenses – includes travel costs incurred when checking the property, showing tenants, collecting rent, doing repairs or cleaning- only if you do this on your own.
30. Pest Control
32. Gardening and yard work – This includes expenses for mowers, fertilizers, land contouring, bug sprays and tree lopping. Some tenants will do this themselves.
34. Utilities – Payment for electricity, water, gas and other utilities will be the responsibility of the landlord if the rental unit doesn’t have a separate meter.
35. Security maintenance – the government requires that rental properties are reasonably secure, so you may have to provide for window locks, deadlocks, burglar alarms and other security paraphernalia.
36. Routine inspection – You’ll have to pay routine inspections regularly, about every six months or so. This report will give you a list of suggestions on things to repair or replace to maintain the property. May be included in property agent’s fees.
37. Maintenance and replacement of capital equipment – This includes hot water tanks, carpets, furniture, light fixtures, heater, air-conditioning, dishwashers, and other equipment used by tenants as part of the rental.
38. Smoke alarms and fire extinguishers – If not already installed by law you need to have a working smoke alarm. Some properties also require you to have a fire extinguisher on site.
39. Building and landlord insurance – This is one of the most important and often neglected investment property costs. Landlord insurance protects investors from unexpected repairs, problematic tenants, early termination of lease agreements and non-paying tenants.
40. Yearly mortgage fees – Some loans are subject to a yearly account maintenance fee, so make sure you read the fine print of your loan agreement to avoid any surprises. This fee is charged once a year to cover the lender’s expenses for managing your loan. What does it mean by “managing the loan”? Well, some loans are considered risky by lenders, so they charge a fee for that, sometimes the fee is part of the loan “package”; where lenders charge a yearly fee in exchange of reduced banking rates, discounts on home insurance and other perks.