Purchase costs of an investment property
In addition to having the required cash deposit or available equity, the following costs are standard for a property investment purchase:
Stamp Duty – levied by each state and territory government, stamp duty is payable on the full purchase price of a one-part contract (apartments, townhouses and houses) and only on the land component for house and land, 2 part, split contracts.
Legal Fees – a solicitor or conveyancer handles the legal review of the contracts and coordination and management of the exchange and settlement process.
Loan Costs – lenders charge application/establishment fees (can be negotiated or) for the loan and for stamp duty on the mortgage, their solicitor’s fees, a valuation fee, search fees and the cost of registering the mortgage.
Loan Mortgage Insurance – If the LVR is more than 80%, the lender will charge LMI. Lender’s Mortgage Insurance may be funded as part of the loan and may not require a cash outlay.
Pro-Rata adjustments– On settlement, you will have to allow for adjustments to the rates pro-rata for the year, (council rates, body corporate fees etc.,) In other words, pay your share of the annual costs.
Independent Building Inspection – it is advisable to engage the services of an independent building inspector to make sure that any defects are rectified before settlement takes place.
Quantity Surveyor’s Report – to claim the maximum deductions allowable for depreciation, it is essential to have a professionally prepared, itemized report that is handed to your accountant once for the life of the property.
Insurances – property investment like any other investment, carries some risk. Insuring your valuable asset will manage the risk via building, contents and landlord’s insurance. Lenders will require the property to be insured, naming the lender as the interested party, before advancing the borrowed funds.
As a guide, it is recommended to allow 4-5% of the purchase price for the costs of purchase in addition to the required deposit.
For example, to purchase a $500,000 property as a cash depositor, avoiding paying LMI, you would require:
DEPOSIT = $100,000
COSTS = $25,000
TOTAL = $125,000
To purchase the same property relying on the adequate available equity in other property, you would require:
DEPOSIT = NIL
COSTS = NIL
TOTAL = NO CASH OUTLAY
If the contract is a 2 part, house and land construction, stamp duty will be levied on the land component only, presenting the opportunity for a significant saving. However, there needs to be an allowance made to service the loan during the construction period.
The land is funded first, and then the house is built and paid for in stages.
One month after settlement of the land, interest will be payable on the outstanding balance.
Once construction starts, the building is paid for in stages, and so the loan balance progressively increases until fully drawn down after the final construction payment.
It’s like making ‘mini mortgage’ payments. The first full mortgage payment will be due one month after the loan is fully drawn down by the borrower.
When the reduced stamp duty applicable on land only is added up with the cost of servicing the loan during construction, it will be very similar to stamp duty payable on a single contract.
Both stamp duty and interest during construction are considered to be sunk costs and can be offset (claimed) against any capital gains tax liability when the property is eventually sold.