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Purchasing a property means having a big down payment (a.k.a. a deposit) ready to go. But stacks of aspiring property owners and investors don’t realise this is just the tip of the iceberg.
Along with one-off costs (like stamp duty, building reports and mortgage registration fees, there are plenty of additional homeownership costs that might take you by surprise.
To help you get your head around all the costs and expenses you’ll need to budget for, we’ve rounded seven lesser known homeownership costs to add to your radar. Plus, we’ll give you a ballpark figure of unexpected costs and expenses to help you budget for your first (or next) property purchase.
What are the upfront costs of securing an investment property?
Aside from saving for a deposit (typically 20% of the property’s value), there are a bunch of other upfront homeownership costs to add to your budget. The good news is that these are one-off costs, meaning you won’t have to worry about them cropping up again and again.
As a property investor, you need to be across all the numbers ahead of time to make sure you’re securing the right property for your investment goals. Running into unexpected upfront costs can put you behind before you’ve even secured your first tenant.
So, let’s run you through the upfront costs of homeownership you’ll need to pay when securing an investment property:
- Stamp duty: this is a type of government tax that is applied to big purchases (such as real estate, cars and even insurance policies). The amount you need to pay depends on the type of property you’re buying, whether you’re a first-home buyer and if you’re securing a new or established home (or even vacant land).
- Conveyancing fees: these are fees charged by a conveyancing lawyer to prepare and organise the legal documents and costs of transferring property ownership into your name (such as overseeing the contract of sale and sourcing the Certificate of Title for the property).
- Pest and building reports: these reports give you an accurate snapshot of the current condition of a property you’re thinking of buying. They help identify any potential issues to prevent you from buying an investment property with serious defects or costly structural issues.
- Buyers agent fees: to help speed up your property search, you might choose to hire a buyer’s agent to source suitable properties and even negotiate the sale price on your behalf.
- Home loan fees: to set up a new home loan, many banks will charge a stack of upfront fees such as application fees ($200 to $700), valuation fees (sometimes this is offered free of charge, while other banks will charge up to $300) and mortgage registration fees (up to $187).
- Lender’s Mortgage Insurance (LMI): if you’re purchasing a property with less than a 20% deposit, you’ll need to pay LMI (a type of insurance used to protect banks if you can’t meet your loan repayments).
As you can tell, the amount you spend in upfront costs really depends on the type of property you’re buying, the location of your property and how much of a deposit you have ready to go.
Let’s run you through an example based on a property valued at $750,000:
- Deposit (20%) = $150,000
- Stamp duty = $29,250
- Conveyancing fees = $1,500 (approx.)
- Building and pest report = $500 (approx.)
- Buyer’s agent fees = $7,500 (approx.)
- Home loan fees = $887 (approx.)
- Total upfront homeownership costs = roughly $189,637 (or more)
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What are the ongoing costs of owning an investment property?
Along with these upfront homeownership costs, there are a bunch of ongoing costs to add to your budget as an investor.
Repairs and property maintenance costs
Keeping your property in good condition through proactive maintenance is one of the smartest ways to keep your homeownership costs down as an investor.
Rather than waiting for issues to crop up, preventative property maintenance uses routine inspections and regular maintenance (such as annual pest checks) to keep your rental in good condition.
When it comes to budgeting for repairs and property maintenance, one of the easiest ways to track costs is to use a clear formula. For example, the 50% rule suggests that your total operating expenses (including maintenance) add up to 50% of the income your rental property earns.
Using this formula, if you’re earning $2,000 per month in rent, you should spend $1,000 or less per month in maintenance costs. In this example, you’d expect to pay up to $12,000 per year in maintenance and repairs.
What is the cost of homeowners insurance?
Preparing for the unexpected is a smart way to protect your rental income as a property investor. That’s why an important homeownership cost to add to your budget is landlord insurance cover.
This insurance policy covers you in the event that your tenants aren’t able to pay rent, you experience theft or burglary of belongings lease to your tenants or even in the event of natural disasters.
Let’s run you through what you need to know about landlord insurance products and insurance premiums.
Typically, you’d expect to pay around $208 per month in landlord insurance (for a property valued at $1 million). However, this cost will change depending on the value of your property, the sum insured and the level of cover you purchase.
While tenants will typically pay for gas and electricity, landlords will need to budget for a bunch of utilities charges as part of their homeownership costs.
This means council rates, water rates and strata levies and body corporate fees (if your property is part of a strata) will need to be paid by you as the landlord.
These utilities charges will vary depending on where your property is located.
Generally speaking, rental properties in Sydney will need to pay:
- Upwards of $1,000 per year in council rates
- Roughly $800 per year in water bills
- Roughly 0.3% to 1.2% of the property’s value on strata fees per year
As a landlord, you need to make sure your rental property meets the latest health and safety guidelines in Australian law. If you’re found to have a non-compliant property, you can face charges up to $220,000.
That’s why it’s important to budget compliance into your homeownership costs, which includes:
- Reviewing decks and balcony safety
- Checking window safety
- Booking annual smoke alarm inspections
- Ensuring your swimming pools and spas are fenced correctly
- Checking locks and security devices are working
- Reviewing electrical and gas safety
- Keeping mould, pests and vermin under control
In most cases, the costs of keeping your property compliance are covered in your property management fees (more on that next). This is one of the many reasons why 80% of property owners in Australia choose to hire a property manager to take care of their property for them.
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Property management services fees
Hiring a property manager is a smart way to make your rental property a set-and-forget stream of passive income. With an experienced property manager by your side, everything from routine inspections to chasing rental arrears and even setting the right rental price will be done on your behalf.
While every property manager will have their own way of calculating property management fees, the fairest way of calculating this homeownership cost is to charge a flat fee.
For example, at :Different we offer full-service property management for $30 per week (plus GST), to give our investors simple, transparent pricing with no hidden extra fees.
Emergency costs such as urgent repairs
Along with routine inspections & maintenance, it’s also important to factor unexpected emergencies into your budget as a property investor.
Take this example: an urgent plumbing job can cost upwards of $800, along with $250 for an emergency call-out fee.
While you might not need to use it, smart investors should have a few thousand dollars saved up to cover urgent repairs and emergencies that might crop in your investment property.
One of the most overlooked homeownership costs for property investors is this: re-leasing costs.
A vacant property is one of the biggest expenses you can have as an investor. Even two weeks of vacancy can cost you hundreds of dollars in lost rental income.
Plus, re-advertising your rental property, hosting inspections and selecting the right tenants can cost you (or your property manager) significant amounts of time, energy and money.
Let’s crunch the numbers: for a rental that is charging $600 per week, a vacancy period of 4 weeks between tenancies is likely to cost upwards of $2,400 in lost rental income and re-leasing costs
How much does it cost to own an investment property?
You might be wondering what you should budget for the unexpected costs of homeownership. Luckily, we’ve run the numbers and have come up with a ballpark figure to help you plan for these unexpected homeownership costs.
Ready to understand the true cost of homeownership?
Here is roughly how much you’re likely to spend in investment property costs per year:
- Repairs and maintenance: $12,000
- Landlord insurance: $2,496
- Utilities: $9,300
- Property management fees: $1,716
- Emergency costs: $3,000
- Re-leasing costs: $2,400
- The total average cost of homeownership: $30,912 per year (approx.)
When it comes to being a successful property investment, understanding the true cost of homeownership will allow you to budget for your rental property with confidence. By having this ballpark figure of homeownership costs in mind, you won’t be caught off guard by the unexpected costs of homeownership.
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Disclaimer: The views, information, or opinions expressed in this blog post are for general information purposes only and should not be relied upon. We have not taken into account specific situations, facts or circumstances, and no part of this blog post constitutes personal financial, legal, or tax advice to you. You should seek tax advice from your accountant, specific to your situation.