Everything You Need To Know About Upfront Property Costs
When people talk about property investing, the focus is usually on purchase price, holding costs, rental yield, cashflow, being able to pull out equity and so on.
But the single greatest barrier to building a property portfolio for the untrained property investor is right at the entry.
Upfront costs are what keep so many who would be purchasers out of the property market. A lot of people who would have no problem servicing a loan on a property don’t even get the chance to show what they can do because they can’t stump up enough money up front to seal the deal.
But how does that work?
Saving a deposit
Our mega low interest rates make servicing a loan a breeze, but they also make saving a deposit extremely difficult. Say you want to buy a $200,000 property, you’re going to need a $40,000 deposit if you want to get an 80% LVR – which is advisable if you want to avoid lenders mortgage insurance (LMI) and have room to move on your next investment property without being too tied down.
All that saving, you have to do with no help from interest rates. The more time you take to scrounge away a portion of your salary, the higher the property market values climb, and the more inflation takes away the value of the money you are saving.
You do have the option to put down a deposit of less than 20%, but this will involve paying LMI, which is usually somewhere between $5,000 and $20,000 depending on location and other risk factors. The good thing about LMI is that it can be rolled into a mortgage rather than having to be paid in full upfront, so sometimes, getting into a rising property market a year early can see you make enough equity to more than make up what you pay in LMI.
Your 20% deposit may as well become 25% or 30% when you factor in stamp duty. This tax is one of the greatest possible deterrents for transacting property.
In most states, stamp duty was set up as a tax on prestige property purchases back in the days when average homes sold for less than $100,000. The lowest bracket was $100,000, where you paid about 2%; the medium was $300,000, about 3.5%; and the super-rich bracket was $1 million, which could set you back 5% or more.
So, if an average house was $90,000, you paid less than $2,000 in stamp duty upfront. Not so bad right? Well unfortunately, even though prices shot through the roof since then, they didn’t change the brackets. So, now everyone pays a rate that only the wealthy would have had to pay back in the day. Now, to buy an average house will mean paying between $30,000 and $50,000 in stamp duty upfront, on top of your deposit.
There is some relief for first home buyers, who can either have stamp duty waived or discounted, depending on what state or territory they are in, but there are strict guidelines involved and benefits often apply only to newly built properties.
You’ve come up with your deposit and stamp duty money, everything is ready to go, but now you are viewing different properties for sale. If you want to do your due diligence, you need to make sure the properties are not structurally damaged or riddled with termites. So you need to pay building and pest inspection fees. These may only be a few hundred dollars, but if you do it for 5 or 10 properties it all starts to add up. Then, there are fees paid to a conveyancer or solicitor for looking after your contract of purchase, your accountant, the bank and, if you have one, your buyer’s agent.
Once you get the purchase done, you then need to factor in any repairs or renovation costs that need to be considered to boost the value.
The beauty of equity
The advantage property investors always have over owner-occupiers is that they have equity behind them (assuming they already own at least one property). If your family home or property portfolio has had value gain during a very strong year for property markets all over Australia, the equity you can access may cover all those upfront costs for you.
Say you have $200,000 useable equity and want to invest in a $400,000 property, you could account for 40%-45% LVR plus upfront costs, without having to spend anything. If you need more information or help coming up with a strategy, reach out to b Invested by emailing firstname.lastname@example.org or book in a Discovery Session with the team here.