Investment property costs checklist

By Mark Rosanes | 07 Aug 2020

Investing in property can be an effective way to build wealth – but it also requires ample preparation and heavy financing. Real estate investment often entails long-term planning because there several costs that need to be considered before making a purchase.

Understanding what these expenses are can help ensure the right investment decisions are made. The checklist below explains the different initial and ongoing costs associated with investment property.

Upfront costs

1. Deposit

The deposit is a portion of the property’s value that investors need to pay directly to the seller. Typically, residential properties require a 20% deposit while commercial properties require 30%.

2. Loan establishment fees

A loan establishment fee, also called application fee, covers the cost of documentation of a new mortgage. It can cost between $200 and $700 depending on the loan, although there are some banks and financial institutions that are willing to waive this one-off payment. 

3. Lender’s mortgage insurance

Lenders require LMI if the deposit is less than 20% of the property price. This one-time fee is designed to protect lenders from financial loss in the event a borrower defaults on their mortgage. This LMI estimator can help calculate the amount needed to be paid for a chosen property.

4. Stamp duty

Stamp duty covers the cost of changing the title and ownership of a property. It is a state government-imposed tax, meaning the amount differs depending on the state where the property is located. The property’s value and purpose also determine how much stamp duty should be paid. Investment properties often have higher stamp duty costs than those intended as principal residence. This stamp duty calculator can provide an estimate.

5. Connections

These are fees covering utilities and services, including electricity, water, and gas, that need to be installed before the property is ready for occupancy.

6. Legal fees

These include solicitor or conveyancing fees, which cover the legal transfer of the property’s ownership. The amount varies depending on the lender, but fees can start at $100 and, in some cases, exceed $1,000. Title transfer may also require search processing fees, which can cost about $50 per search.

Ongoing costs

1. Loan repayments

The cost of monthly mortgage repayments often depends on the amount borrowed or principal, type of loan, loan term, and interest. An estimate can be provided by this mortgage repayment calculator.

2. Land tax

State governments, excluding Northern Territory, levy annual taxes to landowners. The cost varies depending on the state or territory and does not include properties erected on the land.

3. Council rates

Council rates are a form of property tax that also varies from state to state. These are quarterly or annual fees collected by local governments for the proper maintenance of the council area, and cover garbage collection, plumbing, electrical, and other services. The costs are often indexed against the property’s value and can reach thousands of dollars every year.

4. Body corporate fees

Also called strata fees, body corporate fees are rates charged on properties located in a shared block such as apartments, townhouses, units, and flats. These cover the maintenance of common areas and the management of the block. The cost depends on the condition, size, and location of the property, and can range between $50 and several hundred dollars per week.

5. Building and landlord insurance

Building insurance provides cover to the property and its contents from unforeseen damage resulting from natural disasters such as fires and flooding. Landlord insurance protects property owners against loss or damage arising from tenancy issues, including theft, loss of rental income, and vandalism. These policies are not always required but it is advisable to have them. Annual premiums vary per state but typically ranges from $1,000 to $2,000.  

6. Property management fees

Some investors may opt to outsource day-to-day management of their property. A property manager oversees daily operations of rental properties from rent collection to repair and maintenance. They could cost between 5% and 12% of the weekly rental income.

7. Advertising

Rental properties obviously need tenants to generate income. The internet is replete with real estate websites that owners can use to attract renters. Advertising in these platforms usually costs a few hundred dollars.

8. Repair and maintenance costs

A landlord is responsible for ensuring a property is in a habitable state for tenants, so it is advisable to set aside a yearly budget for costs and repairs.

Investment properties yield many benefits and among these is the potential for solid financial returns. But venturing into real estate investment requires careful thought and planning. The key is not to rush in purchasing a property and consider all the costs involved.

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