Buying an investment property can be financially rewarding, allowing you to live more comfortably and retire earlier. But it’s not a ‘get-rich-quick’ scheme. Before you invest, make sure you understand the costs involved in purchasing and maintaining a second property and the impact to your finances.
4 minute read
Unlike some other investments (such as shares and bank deposits), the entry, exit and holding costs for investment properties can be significant. It’s important to consider all the costs involved – not just the loan repayments.
In addition to the price you pay for an investment property – as with any property – you’ll have to pay stamp duty, settlement fees, insurance, and maybe even building and pest inspection fees.
Stamp duty is a state-based tax and the amount you’ll have to pay will depend on each state or territory’s individual model, but typically the higher the cost of the property, the higher the stamp duty will be.
If you buy an investment property, you’ll have to wait for it to rise in value equivalent to the costs of buying it before you can break even. When determining your final profit margin, you’ll also have to take into account the costs of selling.
If you ever want to sell your investment property and you engage a real estate agent to oversee the process, you’ll have to pay them a fee. Selling agents’ fees will vary from company to company but it can usually be about 2% of the selling price, and in some instances higher.
Therefore, at a 2% charge, if you sell your property for $600,000, you’ll have to pay $12,000 to the selling agent. Any profits you make on the buying and selling of residential property may also be taxed, which will need to be factored into your profit margin.
Beyond the purchase costs and mortgage repayments, you also need to consider the costs associated with owning and managing property. This may include things like property management fees, council rates and strata fees – as well as the regular maintenance costs that come with home ownership, like paying for repairs, renovations and pest control. To make a profit on your property, it will have to rise in value more than these combined costs.
If you hire a property manager to keep your rental property occupied, your property management fees might include:
Tip: You might be able to offset some of the costs of maintaining your investment property by claiming them as a tax deduction.
There are many reasons to invest in property – such as capital growth and rental income – and a lot of benefits. But it’s also important to consider the costs and sacrifices it requires.
You need to consider how buying an investment property fits into your immediate financial and life goals as well as those into the future, and look for properties that will perform over the long term. To do this, you need to define your property investment goals so you can find the right property to suit them, and understand your finances to make sure you can manage the high immediate and ongoing costs of buying property.
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