Investing in property? Here’s the cost breakdown you need
Investing in property? Here’s the cost breakdown you need
Buying an investment property and starting your investment portfolio can be exciting – it’s likely your first step to building wealth and planning for your future. However, it’s not just about signing on the dotted line and finding great tenants. From insurance, to solicitor’s fees, to propertymanagement fees, the costs involved in investment property ownership can growquicker than your list of open homes to visit.
But don’t worry – we’ve got you covered! Let’s dive into these potential costs, so you can plan ahead and turn that investment dreaminto reality.
Purchase costs
In the process between finding the perfect investmentproperty, completing your due diligence to satisfy any conditions, and reachingsettlement day, here are a few key costs to be aware of:
1. Builder’s report – whether you’re buyingan existing property or a new build, you should organise a builder’s report (forbetween $400 - $600, property-dependent) to make sure the property you’rebuying is not hiding any significant issues.
2. Registered valuation – if you have adeposit lower than 20%, or are buying through a private sale, your lender mayrequire you to get a registered valuation before approving the mortgage, whichcan range between $700 - $1,200.
3. LIM report – a land information memorandum (LIM) is not always required by banks, but can form an important part of your due diligence process, providing information on zoning, flooding, heritage protection, building consents and any other information the council might consider relevant to the property. The cost differs around the country, but $350 is an average.
4. Solicitor’s fees – there is a fair bit of paperwork involved in buying property – it’s a big move you’re making! A good lawyer will be invaluable, starting by reviewing the property title pre-purchase, looking to clarify your rights and any restrictions on the property, as well as reviewing auction contracts and sale and purchase agreements. They can order the LIM report, manage conditions, advise on ownership structures, and facilitate KiwiSaver withdrawals – as we said, they’re crucial!
Ownership costs
Before you jump into being a landlord, it’s important to be aware of the costs to include in your ongoing budget. This is worth doing right at the start of the journey – when you’re looking for a property, you should understand if the purchase will mean you’re positively or negatively geared. This refers to whether your rental income will cover your expenses – if it does, your investment is positively geared, and vice versa.
When you’re stacking up your investment figures, make sure you consider these ongoing costs:
1. Rates – paid to the council to fund essential services and infrastructure, these vary considerably depending on the property and location.
2. Insurance – as with any property, you’ll want to take out a house insurance policy, then consider whether you also want to include landlord insurance, which covers events more specific to rentals including loss of rental income.
3. Property management fees – when becoming a landlord, one decision to make is whether you’ll secure tenants and managethe tenancy yourself, or you’ll pay a property manager to ensure the smoothrunning of your rental. If you don’t live in the same city as your investmentproperty, or plan to leave the country for a significant amount of time, aproperty manager is likely the best option. Fees do vary, but are often between6% and 10% of the rent.
4. Accountant fees – an accountant will bee to help you manage rental income and expenses, as well as ensuring taxcompliance and assisting with tax returns. They will tailor their services toyour needs, so best to reach out to an accountant (or two!) to gain a cost estimatefor using their services.
5. Healthy Homes standards – these regulationsput minimum standards in place for heating, ventilation, insulation, moisture,drainage, and draught-stopping, and all rental properties need to comply by 1July 2025. So when you’re assessing a property, consider whether you will needto make any (potentially costly) updates to comply with the standards.
6. Unoccupied periods – you should beprepared for possible downtime either when finding your first tenant, orbetween tenancies, by putting a plan in place to cover your expenses whenthere’s no rental income coming in.
One other watch-out from our experience helping propertybuyers – during the property transaction, take a close look at the list ofchattels. In the last few years, more homeowners have been installing itemslike solar panels on their homes, which can be either owned or leased from aprovider. If you find yourself in this situation, it’s best to reach anagreement on how to handle these items before completing the purchase.
While this list of costs may seem lengthy, knowledge ispower and hopefully you’re now more prepared for the big step you’re about tomake in becoming a property investor. For any advice on the process as you makeyour investment plans, our team is always hereto help.