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In This Video

00:23 Acquisition and Holding Costs
03:54 What rent are we going to receive for the property?
05:32 Maintenance Costs

G’day there, Daimien from Integrity Property Education. If you’re looking at property investing, looking for property investment strategies, or property investment advice, you’ve come to the right place.

Acquisition and Holding Costs

Today’s blog video is about acquisition and holding costs.

Two very different but very important costs that you must be able to calculate and understand if you’re going to be a property investor. Now the first one, acquisition costs, what does that actually mean? Now the acquisition costs of a property means, how much of your money are you going to have to tip in at the start of acquiring a property?

So what things do we need to think about? Well, first of all there will be stamp duty. Stamp duty will vary slightly in each state and you need to go to your government website. The office of state revenue to see how much stamp duty is going to be liable on the property you are acquiring. You’re also going to need legals, now legals in some cases can be as little as $500 and as much as $2000 for your average residential investment property. Building inspector. Your going to need to get a building inspector to inspect the property and usually we advice our clients that you get two inspections done. One as an initial inspection to get the inspection report done and two, to send the inspector back again if there’s any problems with the first report and you’ve asked the seller to fix them up and you’ve asked the seller to fix them up just to make sure they’ve done it. That might cost you about $500 + GST in total to get the two inspections done. Then you have your rental manager, now most rental managers will charge you one or two weeks rent to establish the rental management arrangement and then charge you a percentage after that which can be anything from 6-10% in some cases. So that initial letting fee is an acquisition cost, not a holding cost.

Another one to think about is loan establishment fee. Often the banks will charge you $400 to $500 just to set up the loan. Now once you add all these up, you’ll come up with a total figure of how much you have to pay to buy the property, and they are the costs. Added to that of course must be your deposit. If you are putting in a 5, 10 or 20% deposit in, you’ll need to add that, and if you are borrowing less than 80% you won’t have any mortgage insurance to pay, but if you are going above 80% you will also have to add mortgage insurance to that and you’ll have to ask your bank or your mortgage broker how much that figure is going to be. So by way of example if we are going to by a 450K investment property, with a 10% deposit, we’d need a 45K deposit plus about 20K to cover the stamp duty, legals and all the other costs. Now the mortgage insurance will vary very differently from each bank, but one of the options you do have with mortgage insurance is what they call ‘Capitalising’, where you can just have the mortgage insurance added to the loan instead of having to pay it yourself. That can be very advantageous when your on a tight budget trying to scrape into a property.

So that’s acquisition costs, very important that you understand them. A lot of people get side swiped by them when they are buying their first investment because they don’t
understand that all these extra costs come in as transaction costs at the front. Now the smartest way to deal with acquisition cost is if you are buying your second property after your first one, just get an equity loan on the first one and cover all those costs, and consider putting all your cash into an offset account and keeping that as a cash buffer. Often that is a smarter way to cover the acquisition costs and keep your risk management in check so you always have some cash handy.

What rent are we going to receive for the property?

The second cost that we are interested in a property is our holding cost. How much of your money are you going to have to tip in every month in order to hold that property. There are a whole range of factors that need to come into play. We must consider what rent we are going to receive for the property, and we must consider all of the costs. The biggest cost will always be the interest on your loan. It’s very important that you consider that and in some cases if you’ve got a principal and interest loan then you’ve also got to consider that principle amount that’s going to be chargeable from a cash flow perspective. Yes it will reduce the amount of debt but its’ still something you will have to cash flow. The second biggest expense is going to be body corporate fees. Body corporate fees can vary. A simple town house may have a body corporate fee of about $2500 a year, but in some cases body corporate fees can be ridiculously high, $15,000 – $20,000 for these high rise apartments that have all the bells and whistles, Gymnasiums, eight different fast accelerated elevators, swimming pools and thinks like that. This is why we say to people be very careful when you buy apartments or townhouses because that body corporate fee can wipe out your cash flow and it can be very expensive, so make sure you think about what the body corporate fees are going to be.

Third one is rates. Rates generally speaking will be around $2000. Give or take. As a planning figure. Make sure you check with the local council what rates they are going to charge on the property, and also there are some cases where rates can be particularly high. If you are buying commercial property or you are buying in canal estate, you can have particularly high rates as often canals have particularly high rates for drudging of the canal and thinks like that.

Maintenance Costs

Other holding costs you are going to have to consider are insurance. You will have to consider building and your land lords insurance. You will also have to consider the maintenance costs of the property. If you are buying brand new and the property has a warranty, your first year the maintenance costs will be zero, depending on your warranty, but if you are buying an old property, often the maintenance costs can be very high. One year it’s the carpet, next it’s the air conditioners, next year it’s the plumbing, next year its painting, next year’s its weatherboards and things like that. You can be blown right out of the water by not considering those costs.

When investing in property, two costs to think about. The acquisition costs, how much of your money will you have to put in upfront, and then holding costs, how much money will you have to put in week to week to hold onto it. Of course you should also speak to your accountant to see what your tax return is going to be for that property and then it is an equation of rent + tax return vs expenses = am I going to end up in front, or behind after tax. If you are going to end up in front go for it, if you are going to end up behind, seriously reconsider buying that property as you can only own so many properties where you have to chip in the balance of the funds.

That’s it from me. If you haven’t been to our one day course we run them all the way around the country. Remember they are absolutely free and no obligation to do anything at the end.

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