Last Updated: 28th March, 2023

When investing in the property market, understanding the associated costs of buying and owning an investment property is essential. Knowing these costs can help investors make well-informed decisions. As with any form of investment, it’s essential to complete your research before taking advantage of the potential capital growth and income investing in real estate offers. In this article, discover the financial implications of owning an investment property as we delve into the costs involved. From the initial expenses to the ongoing and hidden charges that may arise, we’ll explore everything you need to know to make informed decisions about your investment strategy.

Upfront Costs

Deposit: Purchasing an investment property usually includes a deposit worth 5-20% of the total purchase price. This provides security for the investor and the lender and will depend on each party’s circumstances. Investors must have sufficient funds available to cover transactional costs associated with the deposit. Stamp duty: Stamp duty is an unavoidable cost for property investors. However, the amount payable can vary greatly depending on the state or territory of purchase. Potential purchasers need to understand the applicable stamp duty rate within their state, which can form an integral part of their budget considerations when purchasing an investment property. Generally, stamp duties are a percentage of the property’s price, with rates ranging from as low as 2% up to 7% and occasionally higher still in some territories. Unlike investors, first-home buyers may benefit from stamp duty concessions or exemptions certain states provide. Conveyancing and legal fees: Investors should engage a solicitor or conveyancer to ensure the legal aspects of their property purchase are taken care of properly. This includes conducting title searches, reviewing contracts, and transferring ownership. Fees for this service will vary depending on the complexity of the transaction and the solicitor or conveyancer’s rates. As a general guide, most conveyancing and legal fees range from $1,500 to $3,000, although it is worth shopping for competitive pricing. Building and pest inspection fees: The cost of a building inspection can vary based on the size and location of the property but usually ranges from around $500 to $1,000. A pest inspection usually costs about $250 to $350. The building and pest inspections can help you identify any existing structural or pest-related issues with the property so you have time to budget for repairs or decide on alternative options. Lenders Mortgage Insurance: For investors borrowing more than 80% of the property’s value, Lenders Mortgage Insurance (LMI) may need to be paid to protect the lender in case of borrower default. The cost of LMI will vary depending on the deposit size, loan amount and lender. Generally speaking, LMI must be paid if the deposit on a loan is less than 20%. LMI could easily exceed $10,000 on a $500,000 home loan with a $50,000 deposit.

Ongoing Costs

Property management fees: Hiring a professional property manager may be a wise investment for property owners looking to maximise the value of their rental properties; however, the management fee associated with engaging these services must not be taken lightly. Property managers typically charge between 5% and 12% of collected weekly rent, an expense that can accumulate significantly over time. Different factors like the location and size of the managed property can also increase the fee in some cases. Council and water rates: As a property owner, it is important that you are aware of the various rates your local council will charge for essential services such as garbage and water collection, street lighting and water supply. Council rates and water rates can vary over time depending on the size and type of property and your local council. Generally, investors should prepare to pay around $1,500 to $3,000 annually for these expenses. Building and landlord insurance: By taking out building and landlord insurance, investors can safeguard their investments from loss or damage. Building insurance covers the physical structure of the property. In contrast, landlord insurance offers coverage for lost rental income and other issues that arise specifically for landlords. The insurance cost will depend on the cover needed, but protecting your investment from unforeseen risks is always worth the expense in the long run. Repairs and maintenance: Property owners are accountable for ensuring that their property is regularly maintained and necessary repairs are completed. Routine maintenance such as keeping the garden tidy, dusting and sweeping will prolong the property’s life while improving its general appearance. Depending on the condition of a property, more complex forms of repair may be required, such as plumbing or electrical work – their cost depends on time, labour costs and the type of materials needed. Strata fees (if applicable): The strata fees charged by the relevant body are applied to maintain any common areas of a complex, including gardens, swimming pools and elevators. Owners must consider that the cost of these fees will vary depending on factors such as the size and type of their property. It pays to research these fees carefully before purchasing a property that falls under a strata agreement – they amount to an extra expense that demands serious consideration. Land tax (if applicable): Depending on the property’s location and value, the land tax could range from a manageable fee to an unfavourable amount. It pays to research state or territory-specific land laws before any property purchase, to prepare for extra costs.

Hidden Costs

Vacancy periods: Investors must carefully consider the possibility of vacancy periods when investing in property. These times can vary due to many factors, such as tenants moving out, difficulty locating new tenants, and required renovations or repairs. As such, investors must budget accordingly and ensure they can handle the associated costs of owning property during extended vacancy periods. Capital gains tax: Any investor considering selling an investment property should know the potential Capital Gains Tax (CGT) liability. Numerous factors influence how much CGT is payable, including how long the property has been owned and the investor’s marginal tax rate. Larger capital gains usually lead to higher CGT liabilities, so investors must consider this when making decisions about investment properties and evaluating the overall profitability of their investments. Interest rate increases: As interest rates can change throughout the lifetime of an investment property, investors should always prepare for the possibility of an increase. These could significantly raise their mortgage repayments, so it is essential to consider them when evaluating the long-term profitability of any investment property. Market fluctuations: Potential market fluctuations can affect both the anticipated rental income and the overall value of a property while an investor is deciding whether to buy. For instance, if the market is oversupplied with rental properties, competition for tenants will increase, resulting in declining rental incomes. Similarly, during economic downturns, the property’s value may decrease significantly, depending on how greatly the market is affected.

What Tax Benefits Are Available For Owners Of Investment Property In Australia?

Owning an investment property in Australia offers multiple tax benefits that can magnify profitability. These include negative gearing deductions, capital gains tax (CGT) concessions, and deductions for expenses such as interest on the loan, property management fees, repairs and maintenance, and depreciation. To ensure these advantages are maximised, and all eligible deductions are taken, it is important to regularly consult with a registered tax professional and stay up to date with changes in laws that may affect your financial situation. With the professional’s help, you can be confident that you are taking advantage of all available opportunities to increase your return on investment. For more on investment property and taxes, check out our page on which investment property expenses are tax deductible and which deductions you can claim.

Tips For Managing Costs And Maximising Returns On Investment Property

  • Conduct thorough research and due diligence before investing in a property to ensure it is in a desirable location, has good rental potential and is within budget.
  • Regularly review rental income and expenses to ensure the property generates a positive cashflow.
  • Consider making energy-efficient upgrades to the property to reduce ongoing costs such as electricity and water bills.
  • Keep current with market trends and rental demand to ensure the property remains competitive.
  • Consider the long-term investment strategy, such as holding the property for capital growth or generating a steady rental income, and adjust the investment strategy accordingly.
Note: You can use our investment property calculator to accurately predict the weekly cashflow position of your next investment property.

Talk To An Expert

Whether you’re a novice or an experienced investor, our team of knowledgeable mortgage brokers is here to provide expert guidance with every step of the way. Some of our brokers have first-hand experience in property investment, so we understand the challenges and rewards of building a successful investment portfolio. Call us on 1300 889 743 or submit a freeonline enquiry to explore your investment options confidently.