Discover the true costs of buying and holding an investment property in Australia. From deposits and stamp duty to property management and ongoing maintenance, we break down all the expenses you need to know. Plus, learn how to manage costs efficiently and build a scalable property portfolio.
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I talk a lot about how to purchase property, why we want to be investing in the market, and understanding economic cycles. But, let's just get some practical knowledge down on paper.
You might be someone wondering: What are the upfront costs? What are the ongoing costs around holding an investment property?
In this article, I’m going to share exactly what that looks like, and show you a streamlined way to manage all your ongoing costs, and it’s going to take you no time at all. This is especially important if you’re planning to build a portfolio of three, four, or five properties.
If you’re interested, keep reading.
Now, there are two main parts to the costs associated with purchasing property:
The acquisition cost is made up of all the costs you will be associating with when purchasing a property.
Now, you need to have the following:
1. Deposit: The minimum deposit is typically about 10% for residential properties. If you’re purchasing commercial property, those numbers will differ.
2. Stamp Duty: This depends on the state—it’s different in every state because they use different calculators. Essentially, this means some states are more greedy than others (let’s be real).
3. Conveyancing Costs: This involves someone reviewing your contract and helping you through the process of contract negotiations to settlement. They also organise your settlement.
4. Pest and Building Inspections: Some people skip this step because it’s optional (unlike stamp duty, which is non-negotiable).
When it comes to pest and building inspections, some people have differing views on this.
They might say: “Oh, it’s a brand new property. I don’t have any issues with it. I’m just going to move in," or "I’m going to go ahead and purchase that property."
In other circumstances, people might say: “Look, it’s a hot market. I just want to go and buy it.”
Having no pest and building clause in the contract will make you a very favourable buyer.
However, we, under no circumstances, purchase property for myself or for any clients under Search Property without this pest and building inspection clause. The main reason is that if you go ahead and purchase something and you don’t actually know what’s inside those walls, or if there are termites underground or they’ve already eaten most of the roof, you’re not going to know that.
Therefore, I would definitely advise you to go and get these things done because it’s going to save you a lot of money in the long run.
5. Buyer's agency fee.
Is this a non-negotiable? Definitely not.
However, I’d strongly recommend having one—despite the fact that this is going to sound biased, given that I am a buyer's agent at Search Property. It is very important.
The reason I say this is because your biggest advantage is speed.
When you align yourself with a buyer's agency—a professional that does this day in and day out across multiple deals—their chances of securing something with significantly better value compared to someone who buys property once a year are vastly different.
Now, that pretty much rounds up all of your acquisition costs.
For example: We purchased a property for $456,000.
Now, despite me saying earlier in this article that you can go ahead with a 10% deposit, at 12% it covers your LMI (Lenders Mortgage Insurance) and helps reduce the LMI figure as well.
In total, acquiring this property cost $73,860, and then on top of that would have been the buyer's agency fee.
This number is a lot less than most people think.
Many still believe that you need a minimum 20% deposit before purchasing a property. For a property like this, that would mean saving $120,000 to $130,000 before entering the market.
You wouldn’t believe it, but so many people out there still think—and still listen to those who say—you need a 20% deposit and can’t go lower for an investment property. They’ll also tell you that you can’t get interest-only loans anymore, which is completely untrue.
You can definitely get interest-only loans at a 90% lend. So just be careful who you listen to.
Of course, it would be amazing if you could purchase a property and have it be easy to maintain with income simply flowing in. Unfortunately, there are some costs associated with holding the property.
If you see the bigger picture and understand how property cycles, land cycles, and their relationship with inflation and interest rates work, you’ll value why someone should invest in real estate—even in today’s market. It is very important to understand historically where we’ve been to have an idea of where we could be heading, even though nothing is guaranteed.
1. Council Rates, Water Rates; and Insurance
Bundled together, these will roughly cost $4,500 a year.
Now, in terms of property management, I get this question quite a bit: “Hey Ravi, do I pay extra for my property management? How does that work?” I’m going to break it down for you.
When you go ahead and receive your rent, you will get a portion of that given to the property manager. They take their cut, and it's usually between 7% and 10% of the weekly rent. So, here you can see why it’s so important that you get the right property manager.
The right property manager could be worth so much more than 10%, but there are others that are completely garbage, and you probably wouldn't want to pay them anything at all. But this number comes to about 7% to 10%.
Now, in this case, this property is going to rent for $550 a week. This could cost anywhere between $38 and $55 every single week.
Now, I know this number does sound like a lot, and truth be told, yes, it is a big portion of your income that you generate.
However, you have to think about the bigger picture. You’ve got to think scalable. You’ve got to think, how do I get from one property to the next and the one after that? Because saving $1,000 or
$2,000 is going to increase the level of headache and involvement you’re going to have with each property.
I can tell you now, if I had to do this for every single property and said: Hey, you know what? I'll save my $1,500 a week and not have it properly managed, then I’m going to take on so much more risk.
In addition, because I’m not located locally, I can’t visit the property, which means I’m always going to have to either fly in or actually rely on someone else doing that for me. This is why I have the right
property managers across all of Australia for all of my properties. This is a non-negotiable for myself.
The other part of the non-negotiable when it comes to ongoing costs is insurance. You need to have proper insurance because sh*t can happen.
Trust me, you don’t want to be in that space where there’s a flood or a cyclone in an area that never had cyclones before, or you’ve also got your tenant that’s gone in there and maybe had a problematic tenant who went out there and destroyed the whole property.
If you don’t have insurance, you’re going to be pretty much screwed. So, you definitely need one.
4. Interest repayments.
Now, if you have a loan on the mortgage, you’re going to pay interest only, or you’re going to go with interest plus principal.
If you’ve got interest plus principal, the first part, being principal, that’s not really considered an ongoing cost.
However, as part of your cash flow analysis, you’re probably going to want to consider that because you’re still having to pay it. But the interest component is an expense.
5. Wear and tear.
Now, wear and tear could mean anything for anybody. I’m going to tell you what it means for me. It means that I allocate between $1,000 and $2,000 every year, despite, in most cases, not having to use that money.
However, this would cover things like door knobs, plumbing issues—things that just pop up out of nowhere. Then, occasionally, you’ll see that maybe I don’t have any issues on one of the properties for, say, two or three years, and then I might go, Well, three thousand or four thousand dollars to put in a new air conditioner to upgrade my property.
Equally, you could go ahead and say, I’m not going to really upgrade anything for the next three years, and after about three or four years, I can do a smaller renovation or a bigger one. That could range anywhere between $7,000 all the way up to about $45,000 to $50,000.
As part of my strategy, I’m going out and trying to acquire all the properties I can, and then after about three to five years, I can go in and renovate each property every six or seven months. That’ll allow me to increase the equity, but also not use my money today, which I could use towards acquiring new land or acquiring new properties.
I’m not saying, you know, just land on its own or a new off-the-plan property or house-and-land package. No, I’m definitely not talking about that.
However, when it comes to me acquiring properties, I’m looking for established properties. Go out there and just keep acquiring so that I can always go around in a couple of years to renovate.
Could I go ahead and purchase that exact same property at the exact same price? Chances are, probably not.
If you’ve stuck all the way through, I’m going to show you the streamlined method that I use, and it ties in with how people say you can’t really manage that many properties, still maintain a full-time job, and have a life outside of this.
Although having a life outside of what I do is questionable, because I’m a nerd, it definitely is possible, and you can scale up very quickly.
So, what I do is I have my water rates, council rates, and insurances all paid through my property manager.
What I mean by that is the council rates and water rates get sent straight to the property manager, and they pay it quarterly, so I don’t have to worry about those things.
What they do is, with the rent that they receive in that month, they use a portion of that to pay for the council rates, a portion of that to pay for the water rate, and maybe your monthly insurance premium. Then, whatever’s left comes back into my account.
Now, there are two reasons I do this:
Therefore, it makes the whole process a lot easier, and I definitely advise you to go ahead and do something similar.
I hope you guys have learned so much from me in this article.
I’ll catch you guys in the next one. Thanks, guys!
Disclaimer: Search Property Pty Ltd (SP) does not provide financial or investment advice and does not hold a financial services license as defined in the Corporations Act 2001 (Cth). Any advice given by SP is general in nature and does not take into account your personal circumstances or objectives, financial situation or needs.
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