Costs of buying and owning an investment property

Investing in real estate offers a number of advantages over investing in other asset classes. These include being relatively easy to understand and easy to finance compared to, say, investing in shares. Despite this, there are still hurdles you need to overcome, and the first question that many aspiring property investors ask is: "how much money do I need to start investing"? 

When searching for property investment, a lot of people calculate their cash flow based solely on their expected mortgage expenses and rental income. However, failing to consider costs can be a big mistake that could potentially result in a poor investment decision.

So what are the costs involved in buying an investment property?

The costs of investing in property can be split into two sections: upfront costs and ongoing costs. Here are some of each you may encounter when buying and owning an investment property:

Upfront costs of buying an investment property

Deposit

The size of the deposit you need will depend on the value of the property you want to buy. Most lenders will accept a deposit of 10% of the purchase price. So, if the property is priced at $400,000, you will need to put down $40,000 of your own money. Bear in mind that if you only have a deposit of 10%, you will need to pay for Lender’s Mortgage Insurance (LMI), which protects the lender if you can't repay the loan.

If you have a deposit of 20% or more, you can avoid LMI. 

Lender’s Mortgage Insurance

The cost of Lender’s Mortgage Insurance will depend on the size of your deposit and the amount of money you are seeking to borrow. Usually, LMI is a one-off charge which you can add to your home loan. 

Stamp duty

Stamp duty is another upfront cost when you invest real estate. Stamp duty is a tax imposed by the state government. The price of stamp duty will depend on the price of the property you’re buying, where you’re buying, and the purpose of the purchase. Generally, you’ll need to pay stamp duty at settlement. You can get an estimate of how much stamp duty you’ll need to pay by using our online stamp duty calculator.

Calculate stamp duty

Conveyancing fees

You should also factor conveyancing fees into your investment property budget. Conveyancing is the legal process of transferring land or property ownership from one person to another. Conveyancing can be done by a licensed conveyancer or a solicitor. The average cost of a conveyancer is between $500 and $800. You may pay more for a solicitor which can range between $600 and $1,000 including disbursements.

Building and pest inspection

An investment property that has structural or pest issues will cost you thousands of dollars to repair. To avoid this, you should get a building and pest inspection report. This can cost you $300 to $1,000 depending on your area and the size of the house.

Sample upfront cost to invest in real estate

Let’s say you’re investing in a house that’s worth $400,000 in Queensland. If you put down a 20% deposit so you don’t have to pay for LMI, your deposit will be $80,000. Your stamp duty is priced at $13,535. Conveyancing fees cost $800. Building and pest inspection cost $500. Considering only the upfront costs, you will need $94,835 to invest in a property.

Mortgage registration fee

Mortgage registration fees are paid to state and territory governments to register the property as the security or collateral on the investment home loan. This allows future buyers to check any existing or previous claims on the home. The fee ranges from $130 to $200, depending on where you are in the country.

Land Transfer fee

This is usually also payable to the state or territory governments and the fees can range from $150 - $5000+.

Application fees

Also known as an establishment, start-up, or set-up fee, application fees are charged at the start of your home loan to cover the administration of setting up and processing the loan. Many lenders will waive these as a promotion, but they’re often non-refundable if you do end up paying them.

Ongoing costs of investment properties

Repairs and Maintenance

There are many things that can go wrong with a property. The walls might need a fresh coat of paint, you might need to replace a broken fence, or fix leaky pipes. It’s important that you have funds set aside for these maintenance expenses.

Body Corporate Fees

You will need to pay body corporate fees or strata fees if you own a unit or a townhouse that’s within a complex. These fees are used to maintain amenities within the building such as swimming pools, gardens, lifts, or a gym. Keep in mind that more features will mean higher body corporate fees.

Insurance

As a property investor, it’s important to consider the types of insurance you will get. Of course, you should insure the property, but you may also want to get a higher level of cover with landlord's protection insurance. This covers your property against loss or damage caused by tenants, whether it is by accident or deliberate. Depending on your provider, landlord's insurance can cover you for accidental or malicious damage to both the structure of your property and any contents that you may have leased to your tenants for their use.

Property Management Fees

You will pay this if you hire a property manager for your property. In return for the money, they will market your property, dealing directly with prospects and tenants, collecting rent, handling maintenance, tenant complaints and any evictions. The cost of hiring a property manager will depend on which company you use.

Utilities

Utilities are a common ongoing cost of living in a property and include things like electricity, gas, and water. You can offload these costs to your tenant if you wish, but if you’re keen to attract tenants you may consider incurring the cost yourself.

Council Rates

Council rates are the responsibility of the landlord. They are paid on an annual basis. The rate levied on a rental property will vary depending on the local government area.

Mortgage Repayments

This will probably be your largest ongoing cost when buying an investment property. Your mortgage repayment will vary depending on the amount you borrowed, the term of your loan, loan type, and any loan servicing fees.

Bottom Line

As a property investor, you need to add all of these additional costs into your budget before buying an investment property so you can make a realistic estimate about the expected return and ensure positive cash flow. 

Tax

Tax can be a costly thing when investing in property, but when done right it can be your best friend. That’s because many of the above costs mentioned can be tax-deductible, as is the depreciation of your property and some of its contents. If you decide to sell your property, you may incur Capital Gains Tax, which can also be incredibly costly.

Investment properties and tax are a highly complex topic, read our quick guide on tax deductions for investment properties or consult the Australian Tax Office or a consultant to see how much you may have to pay and what's tax-deductible.

Thinking of buying an investment property?

When it comes to buying an investment property, it’s important to get a full picture of the costs involved so you can weigh them against the potential benefits. If you are thinking of investing in property and want to find out more, why not talk to one of our lending specialists today or read our helpful checklist for buying an investment property.