Investment property costs: upfront and ongoing costs

Investment property costs: how much does it cost to invest in property?

Investment property costs: everything you need to know about upfront and ongoing expenses.

There are various financial considerations involved with investing in property. This article provides an overview of the costs associated, including upfront expenses, ongoing commitments, and potential tax benefits.

If you are investing in property without owning an existing property, you will need a deposit of at least 5% plus expenses like stamp duty and Lender’s Mortgage Insurance (LMI).

Existing property owners can potentially leverage equity as a cost-effective way to invest although some other expenses are involved.

• Upfront investment property costs include stamp duty, LMI, land tax, conveyancing, legal and planning fees, as well as building and pest inspections.
• Ongoing expenses include capital gains tax, property management fees, insurance, council rates, strata fees, and maintenance and repair costs.

Costs associated with owning an investment property are often tax deductible. It is important to keep records and consult accountants to maximize tax benefits.

How much deposit do I need to invest in property?

When considering how much deposit you need for an investment property, there are generally two routes. You can either take out a new loan or use the equity in your current home.

If you are taking out a loan, you will need at least a 5% deposit depending on your lender. But using equity in your home means you won’t need to pay any upfront costs to buy a second property.

Both can be achievable depending on your needs and circumstances, but it is important to conduct research before making any financial decision.

A UNO Broker can compare over 20 lenders to help find you the best deal.

Costs of investing in property for the first time

First-time property investors will generally need a deposit of at least 5% alongside funds to cover additional costs such as stamp duty and Lender’s Mortgage Insurance (LMI). The deposit required varies by lender, but a UNO Broker can help you find the best deal.

For example, Bob wants to invest in an apartment worth $400,000. As this is Bob’s first investment, he has approached a UNO Broker who helped find an appropriate lender requiring a 5% deposit.

Bob needs at least $37,000 to cover this investment - including a $20,000 deposit and around $16,000 in stamp duty. This gives a good idea of upfront investment property costs, but it is important to consider ongoing investment property expenses.

Costs of using existing equity to invest in property

It is easier to climb the property ladder once you are already on it. For those with existing properties, it is common to unlock funds for an investment property deposit with equity.

Using existing equity can help avoid LMI on your investment property. However, there could still be some smaller costs such as application fees involved.

Upfront investment property costs

Stamp duty

Stamp duty is a state/territory government tax on documents and certain transactions. Commonly applicable to the purchases of homes, cars and other vehicles, stamp duty varies by state and can also be known as transfer duty or general duty.

The stamp duty on an investment property can be quite substantial. For instance, you could pay $22,000 on a $600,000 investment property in New South Wales, according to UNO’s stamp duty calculator.

Use UNO’s stamp duty calculator to estimate your stamp duty.

Lender’s Mortgage Insurance (LMI)

Lender’s Mortgage Insurance (LMI) is an upfront charge you pay when borrowing over 80% of a property’s purchase price. It is insurance paid by the borrower which covers the lender should anything bad happen.

LMI varies based on factors including your lender, deposit and loan-to-value ratio (LVR). It is usually paid before settlement, but there are flexible options such as adding it to your mortgage or a different short-term loan.

Read more: Lender’s mortgage insurance basics

You won’t need to pay lMI if you are using equity in an existing property.

Land tax

Land tax is a state/territory tax based on the value of land you own, including vacant land, above a certain threshold. Unlike stamp duty, land tax is payable every year and levied based on your land’s value.

The rates and rules for land tax vary by each state and territory. You don’t need to pay land tax on your principal place of residence.

Conveyancing, legal and planning fees

Any investment comes with a degree of risk and responsibility, so it is important to work with professionals who can help you navigate otherwise complicated processes.

Conveyancers are experts familiar with property law who ensure property titles are properly transferred and settled between parties. Advising on any legal issues on the way, conveyancers also help transfer funds between parties when a settlement happens.

Prices vary, but you can expect to pay anywhere from $500 to $2,000 for conveyancing.

Although not a requirement, seeing a financial planner about your investment could be worthwhile. This is a professional who can advise on your financial decision.

Financial planners can be paid via commission, ongoing rates or once-off/hourly fees.

Building and pest inspections

Building and pest inspections can save headaches later when it comes to investment properties.

A building inspector executes construction inspections to determine whether there are any issues with the bones of your property. They typically charge between $400 and $800.

In some states, there is no minimum qualification to be a building inspector. Make sure you choose a reputable company or inspector who demonstrates experience in their field.

No one wants a new property with white ants. A pest inspector can check for all sorts of pests, giving you and your tenants peace of mind. Inspections can cost $200-500 depending on the size of your property.

The ongoing costs of property investment

Capital gains tax

If you make a profit (or capital gain) on your investment property, you will need to pay capital gains tax.

For example, if you buy a property for $500,000 and sell it for $1 million later, you will have made a capital gain of $500,000. This gain must be declared on your tax return and you will need to pay a percentage in tax based on your individual income.

If you hold an asset for longer than 12 months, there is a 50% capital gains discount. So, following the example above, you would declare a capital gain of $250,000.

Read more: How to reduce or avoid capital gains tax on your property.

Property management

Investment properties are big and costly decisions; a property manager can help look after your investment by finding suitable tenants.

Property managers market your rental property, collect rent, deal with bond payments and administration, and perform many other tasks to help make renting your investment easier.

Property managers typically charge 7-10% of rental income which can be tax deductible.

Insurance

It is important to protect your investment with insurance. There are a range of insurance products for landlords including building, contents, liability, and even dedicated landlord insurance which combine multiple policies.

Costs vary depending on your property's location, value, and the insurer so it can help to shop around. If you have an existing insurance policy, you could try asking for a better deal.

Council rates and strata fees

Council rates are a tax charged by your local government that help pay for essential services and maintenance in your area. They can typically be paid in full annually or quarterly.

Rates vary by council. As a rough idea, they average around $1050 annually in NSW or $1612 a year in SA.

If you own an apartment, strata fees are charged to help with building and facilities maintenance. These funds are paid by all apartment owners into a corporate body that administers them as required.

Fees are typically 0.5-1.2% of your property’s value or $15-35 a week, according to Strata Data.

Maintenance and repair costs

Property maintenance costs might include cleaning, general maintenance or repairs should a hot water system or something else break.

These expenses can often happen suddenly so it is important to plan for them by having an emergency fund for your investment property if possible.

How tax deductions can help with the costs of investing in property

There are many tax benefits for landlords. Many expenses associated with owning or maintaining an investment are tax deductible in Australia.

For landlords, this means insurance, property marketing costs, property management, property repairs, and much more are tax deductible.

It is important to keep receipts for property-related expenses and work with an accountant who can advise on property tax deductions.

Read more

• Understanding investment property tax and capital gains tax deductions on property
• What can you claim as a landlord? 5 common deductions
• How to avoid and reduce capital gains tax on property

Information in this article is not intended as financial advice.