Property investment is an incredibly popular form of long-term wealth creation. But just how much of a hit will your back pocket take during the early stages of building your investment portfolio?
There is no magic number to summarise how much money you will need to start investing in property. Primarily, the amount you will need will be determined by the location and type of property you are targeting. Costs vary considerably between houses and units, and regional and city-based locations. Property varies considerably between Australia’s capital cities, primarily due to population, but also due to other economic and employment drivers.
What’s more, your investment strategy will impact how much you need to spend on your property. It’s important to remember that a low entry cost doesn’t necessarily mean a property is primed for significant growth.
Many investors choose to purchase a more expensive property in what is defined as a ‘blue-chip’ suburb (usually in close proximity to the CBD of a capital city) and utilise negative gearing concessions – hoping the property will undergo significant enough value growth to offset the short-term losses.
However, for some investors who place a higher value on cash flow, a low-cost property with a high rental yield may be an ideal investment.
It’s also important to remember that a property investment’s success will depend not just on its location, but its individual attributes.
Spending the same amount of money on two properties will not guarantee that each will perform as well as the other. Growth and yield will come down to how well a property’s attributes stand up to the market. With this in mind, any investor needs to conduct thorough research into the property they are planning to purchase to ensure it stacks up and maximises their investment dollars.
How much will a property deposit cost me?
The most commonly cited cost of a property purchase is the deposit. This is the amount of money you put down at the start of the purchase in order to secure the property and financing. The amount of money you will need to put down as a deposit will depend on the purchase cost of the property. Deposits are calculated as a percentage of the purchase cost.
A commonly cited statistic is 10-20 per cent of the purchase cost, although the figure may be higher for some lenders, property types, or buyer profiles. Changes to lending guidelines in 2015 by the Australian Prudential Regulation Authority have led to many lenders requesting a lower loan-to-value ratio (LVR) on prospective purchases, putting the onus on investors to come up with higher deposits.
Lenders will often require investors with a lower deposit (usually below 20 per cent) or those purchasing a property deemed as being at higher risk of default, to pay for lender’s mortgage insurance (LMI). This is a type of insurance that protects the lender (not the borrower) if the borrower defaults on their mortgage. It is a one-off payment but it can be capitalised into the ongoing repayments on a home loan.
It is also important to consider how the amount of deposit you pay (as a proportion of the property’s value) will affect your investment strategy. Paying a higher deposit may increase the amount you can borrow, allowing you to secure a higher-value property. It may also allow you to avoid the cost of lender’s mortgage insurance. However, if you plan on building your property portfolio rapidly, paying a higher deposit may eat into your capital and reduce your potential to make further purchases in the short term.
Investors will need to pay stamp duty on their property purchase in the majority of circumstances. The amount of stamp duty varies by jurisdiction and property value, but can range anywhere from $20 to tens of thousands of dollars.
Stamp duty is also charged on the registration of a mortgage. This is a charge imposed by state and territory authorities, and varies by jurisdiction. It is typically paid on an investor’s behalf by a lender and absorbed into mortgage repayments. Some states, such as NSW, have signalled their intention to abolish mortgage stamp duty.
Pest and building inspections, an essential component of any investment purchase, will attract a fee. A combined pest and building inspection can cost upwards of $400, depending on the size of the property.
You will also be required to pay conveyancing fees to the legal representative facilitating the purchase of the property, and for your legal representative to conduct any title searches on a property. These costs will vary from business to business.
Ongoing costs of property investment
Securing an investment property is one thing, keeping it is something else!
There are myriad ongoing costs associated with maintaining an investment property. Some of these include:
Loan repayments: The cost of servicing the loan taken out on an investment property will vary, depending on the amount borrowed, loan term, loan type and any associated loan servicing fees.
Council rates and land tax: Paid on an annual basis, these rates vary by local government area.
Water rates: Whether or not a property investor will be liable for the water costs of their investment property depends on whether that property has provisions for the separate metering of utilities. Many older apartments will not have separate metering of water, meaning the owner will typically be liable for water rates.
Insurance: In addition to building insurance, many property investors choose to take out landlord insurance in order to limit the financial impact of unforeseen repair costs and tenant-related liabilities.
Body corporate fees: Paid quarterly, body corporate fees are intended to assist in the upkeep of apartment and townhouse complexes. Detached houses will not incur these costs.
Repairs and maintenance costs: The most difficult aspect of property ownership to anticipate and control are those costs related to maintenance and repairs. These costs can arise at any time and can vary greatly depending upon the nature of the repair and the age of the building – as well as any insurance policies in place.
Property management fees: If you go through an agency, you will need to take into account listing fees each time your property is re-let, as well as ongoing agency fees taken as a proportion of the monthly rent.
Tax on rental income: If your property is working as an investment then it should be providing income in the form of rental payments. These rental payments, along with any reimbursements associated with outgoings, are subject to taxation and must be declared on an investor’s tax return.
Keep some change left over
It might be tempting to go all out and tip your life savings into your investment portfolio – but that would be short sighted and would almost certainly come back to bite you. Properties are tangible assets that are susceptible to damage from the people residing in them, and the outdoor elements.
But even non-tangible things, like home loans, are susceptible to change, both inside and outside of your control. Thus it is important to maintain a buffer for emergency repairs, ongoing maintenance and periods of vacancy, or where your primary income might be subject to unforeseen change.
It might mean making sacrifices to your day-to-day living expenses, or limiting your initial investment amount, but maintaining access to emergency funds will pay off in the long run – often in ways you might not expect.