Uncovering investment costs

The hidden costs to consider when investing in property...

Costs depicted by traffic sign
  • 26 February, 2016
  • PROPERTY MANAGEMENT, COMMERCIAL, RESIDENTIAL
  • Investing, Costs

The price tag

The most obvious expense can also be the most deceptive.  One of the most common mistakes made by first-time investors is over-committing themselves to an investment because they’re unaware of the hidden costs.

For instance, you may toil for ages saving a deposit, then allocate your entire nest egg to purchasing a rental property, being unaware of the various hidden costs behind the price tag. It is recommended you always have some money kept in reserve for unforeseen circumstances.

1.    Mortgage fees - There are a number of charges associated with taking out finance. For instance, most lenders charge an approval fee, usually around $600. Meanwhile, if you’re borrowing more than 80 per cent of the home’s value, often you will have to pay lenders mortgage insurance - normally a one-off payment at the commencement of your mortgage.

2.    Tax obligations- If you are buying a rental property you need to be aware of your tax obligations as you’ll have tax to pay on the rental income you earn. You may have to pay tax when you sell the property as well.

3.    Building and other specialist reports - While not compulsory, it is recommended that you get these professional inspections done before you undertake any negotiations, as knowing exactly what you’re getting into could give you additional bargaining power. The general cost is between $400 and $600.

4.    Legal costs - These cover the legal transferral of ownership (normally via a conveyancer or solicitor), and can vary depending on the type of property you purchase.

5.    Strata fees - Once a seller hands their property over, you immediately inherit all of the attached council and strata fees.

While both owners of houses and units are obliged to pay council rates, it is only owners of units or apartments that will have to incur strata fees.

Strata fees cover the property’s grouped maintenance and building insurance fees and are collected by the building’s owners or manager. These fees are ongoing costs that will continue to absorb your finances, generally quarterly, even after your initial property purchase payment, so it’s important to incorporate these into your ongoing budget.

The costs of owning a property

The old adage “you have to spend money to make money” rings true in real estate. Some of the ongoing costs of property ownership can include advertising for tenants, vacancies causing a lack of income, repairs, maintenance, council rates and insurance.

Employing the services of a property manager can be a smart investment, given that they will be able to take care of all of the above at a justifiable cost, allowing you to put your feet up. Furthermore, you can claim tax deductions on expenses related to your rental property, including property agent fees and commissions. 

LJ Hooker NZ

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