HIDDEN COSTS OF BUYING A PROPERTY
You may think that buying a property is all about raising a deposit and getting a loan – but what about all those extra costs?
Although seemingly ‘small’, together they can add up to a large amount.
DIFFERENT TYPES OF COST
There are three categories of hidden costs;
Costs you pay during the purchase process. These are one-off fees, duties or expenses which need to be factored in along with your deposit to make sure you have enough cash to close a deal.
Surprise costs such as repairs, vacancies etc. These costs can’t always be predicted. It’s best to set aside a cash buffer for when these come along.
TEN MOST COMMON HIDDEN COSTS
1) STAMP DUTY AND GOVERNMENT FEES
Stamp duty is paid by the buyer at the time of transferring the property title.
Stamp duty is controlled at the state government level, so rates, concessions, and exclusions vary depending on your situation and what state you are buying in.
There is a stamp duty calculator online that allows users to figure out how much stamp duty they have to pay across all states and territories http://stampduty.calculatorsaustralia.com.au .
Other Government fees may include a title transfer fee and a mortgage registration fee.
2) LEGAL FEES
Buying a property can be a complicated process. If it’s not done properly, you may end up making some costly mistakes. It’s best to get a professional to help.
An experienced solicitor will review the contract of sale and explain its terms and conditions to the buyer.
They may also perform a title search and certificates check; draw up a Transfer of Land; supply the lender with copies of the sale contract, Transfer of Land and title search (in order to arrange the mortgage) and arrange settlement (just to name a few).
They may also negotiate changes to the contract, including arranging for an extension, or the granting of a license to occupy the property prior to settlement.
A solicitor’s legal fees will usually fall somewhere between $1,000 and $3,000. A conveyancer will probably be cheaper, however, can’t make any changes to the contract of sale.
3) PEST AND BUILDING REPORT
Pest and building reports are an important part of due diligence. Look for a reputable company who provides easy to understand reports with photos.
It is a good idea to get the company to send you a sample report before they inspect your property. This will give an indication of what a ‘typical’ report looks like.
If your property’s report worries you, it’s good practice to call the inspector and get a better feel of what the actual condition is. For example is it consistent with the age of the property? Are there major repairs or preventative measures needed?
Depending on whether you want just a building report, a pest report or both, most companies will charge around $400 to $800.
4) COUNCIL AND WATER RATES
Usually, council rates and water rates (if applicable) are prorated, so the buyer will pay the outgoings from the exact day of settlement.
In addition to this, rates are a recurring annual cost which has to be factored into the property’s cash flow.
Depending on state and/or location, rates can vary costing $1,000 to $3,500 per year.
In the case of commercial properties or apartment blocks, rates can be much more than what you would expect for residential dwellings.
This differs depending on council, some councils include water charges in their council rates, and others separate the bills.
It’s a good idea to ask the selling agent for a printout of the most recent rates statement.
5) STRATA FEES AND SINKING FUNDS
A strata report is usually provided by a buyer’s solicitor or conveyancer. It will tell you the cost of strata fees, and whether there are any special levies in place.
Generally, there is no upfront strata cost at the time of purchase. However, strata is usually charged per quarter, making it an ongoing cost.
Sometimes, there may be a special levy charged to cover the costs of special projects or budget deficits. This should be detailed within the Strata Report.
The report will also include details about the buildings sinking fund. This is an account that exists in order to cover the cost of maintenance work. Usually, there are no charges, unless the building is new and the sinking fund needs to be filled.
Levies can vary widely depending on the age and condition of a building, and the efficiency of the management committee.
6) URGENT REPAIRS
Urgent repairs are things such as replacing a hot water system or oven or insurance claims that attract an excess. These are costs that can happen unexpectedly and need to be paid.
It is important to keep a buffer to cover these expenses, otherwise, you may find yourself with a hole in your pocket.
Having around $5,000 set aside for each property will help to ensure you won’t go bust if the unexpected happens.
7) RENTAL LISTING
It usually costs around one week’s rent plus GST to find a tenant.
If you are in between tenants and you find your property is vacant for a prolonged period, then you will have to cover mortgage interest costs as well.
The buffer you keep for urgent repairs may also be used to fund vacancies if needed.
The ongoing costs of property management are generally between 7- 9% of the rent.
It is important to insure your asset. If you buy strata property, you will generally just need landlord insurance. This is because building insurance is usually covered under the body corporate, but not always.
Landlord insurance premiums can cost between $300 and $400 a year, depending on the location and insurer.
However, if you are wanting to cover a house, you will generally need both building and landlord insurance.
Building insurance can be much more expensive. It can range anywhere between $1,000 and $3,500 a year depending on many factors including the property and insurer.
9) BUILDING RELATED COSTS
If you are building from scratch then there is a whole other world of hidden costs.
Some standard costs are architect’s fees, surveyor’s fees and council approval costs. These can easily cost from $10,000 to $15,000 on an average family home.
Sometimes additional reports, hazard management plans and site works are also needed which can push pre-construction costs even higher.
A builder who is experienced with your area and council should give you a good estimate of what costs to expect. However, it’s wise to keep a cash buffer on hand.
10) LAND TAX
Land tax is one of the most common hidden costs of buying investment properties.
As personal residences are exempt from paying this tax, many people don’t know about it when they go to invest in property.
Every state has a different land tax threshold, you need to check what land taxes apply to you in each state.
Many people think houses are better investments than apartments, but land tax quickly drains the cash flow on houses as they have proportionately more land.
For example, if you owned two investment houses in Sydney, for example, it is likely you would need to start paying land tax on them.
In comparison, if you owned 10 units in Sydney, you may still be under the tax paying threshold.
KNOWING THE COSTS OF YOUR PROPERTY
Knowing the costs before you buy is essential. Unfortunately, investigating all these costs involves a lot of legwork and man hours.
Unless you have countless hours and energy to burn, you will need to get professional help.
An experienced property accountant can help by doing a pre-purchase cash flow analysis.
A solicitor can also help fill in many of the remaining blanks and provide legal advice that could save you money.
If you are buying through a buyer’s agent such as Binvested, you should be provided with a detailed cash flow analysis as part of your service.