Investing: Rental Properties – The Financials Part 1

So, you’ve found your ideal investment property after plenty of diligent research.

You should also consider the financial aspects of buying and owning a rental property.

Buying the Property

Buying a rental property is not just about the purchase price. There are additional purchase costs. These include:

Stamp Duty on property purchase price – this is an amount charged by state governments on property transactions, so it varies from state to state. It is usually calculated as a percentage of the purchase price. Stamp duty is lowest if the property is being purchased to live in by the owners and is the first property they have ever purchased. Sometimes, for a first home purchase, there is no stamp duty below certain thresholds. There are also some concessions on stamp duty if the property is being purchased by the owners to live in. There are no concessions for property purchased as an investment property.

Conveyancing Costs – this is the cost of a solicitor or conveyancer for their services in preparing all the documents so that the transfer of the property can take place.

Various searches – these are the out of pocket costs that your conveyancer will ask for reimbursement. Many of these searches are fees to search government data bases to determine if there are any planned activities on or near the property (eg new roads etc)

Adjustments on Settlement – the adjustments are for things like council rates and body corporate charges. These adjustments occur because while rates may have been levied up to 30 June or 31 December, the transfer of a property hardly ever happens on those dates. The adjustments are to account for expenses that have already been paid by the previous owner that need to be reimbursed to them.

For all of these purchase costs allow between 3% and 5% of the price of the property.

Financing the Property

Banks typically want a minimum 20% deposit of the price of the property. This deposit can be in cash or another property can contribute towards the 20%. What is so magical about 20% deposit? While some banks will lend on a 5% or 10% deposit, they require additional assurance that the mortgage will be repaid. That means the bank will require mortgage insurance. Mortgage insurance is paid by the borrower BUT protects the bank in the event that the mortgage cannot be fully repaid even after the property is sold. Mortgage insurance is expensive as it will require another 2% to 5% of the property purchase price up front.

Check the latest interest rate deals here.

NOTE: Tom On Tuesday IS a CPA but is NOT a tax agent, a financial planner, a banker, a stock broker nor a real estate agent. Please note that all blog posts written on financial matters should not be taken in any way as advice from Tom On Tuesday. This blog post contains general information and the opinions of Tom On Tuesday. This general information also only pertains to Australia. Anyone reading this blog should seek out professional advice for their own personal circumstances before making any decisions.

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One Response to “Investing: Rental Properties – The Financials Part 1”

  1. Investing: Rental Properties – The Financials – Part 2 « Tom On Tuesday Says:

    […] Tom On Tuesday Also on Thursday & Saturday in Dec10 and Jan11 « Investing: Rental Properties – The Financials Part 1 […]

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