All the costs associated with purchasing a property! A 9 step guide to know how much money you really need!
Often when we are looking at buying a property, whether an investment or a place to live, we do pretty quick handkerchief calculations of the capital requirements needed.
About 20 – 30K for stamp duty, 10 – 20% deposit. That’s pretty much it correct? We save and save, then the time comes and we make our purchase, we are very excited, time to celebrate and party!
A few extra bills come in and suddenly you’re putting the bubbles on hold and sending the balloons back. What are all these extra costs! There can be a few extra costs associated with purchasing a property that you may or may not be aware off. So lets go through it so you can budget accordingly and still have that celebration party, rather than sitting alone in the dark.
GO in order, however note different states may have a different sequence (for the most part, this is the order you want to follow)
Just for the sake of an example, lets assume we are purchasing a property for $500,000 in NSW
1. Deposit; Now this is a fairly straight forward one that most people know they need to save up. The regular amount that needs to be saved is a 20% deposit, however there are some exceptions to this rule.
Some professions are seen as more secure by the bank such as Medical Professionals, Charted Accountants, Lawyers etc.. and as such the banks will often allow for a 10% deposit only without triggering LMI.
If you are not in one of those jobs where the bank will take 10%, you can still use a 10% deposit (or anything less than 20%), LMI is then triggered.
So in this scenario lets assume we used a 10% deposit, we would need $50,000 in Capital.
2. LMI; The next cost to be taken into consideration is LMI. LMI is Lenders Mortgage Insurance. This is an insurance for the lender (the bank) not you, if you are borrowing a higher amount of money. This insurance is to protect the bank if you default, and you are the one to pay for it.
At First Brick Property Buyers Agency, our stance on LMI is “avoid it if you can, embrace it if you have too” LMI is often capitalised over the life time of the loan so at times it may not be a huge significant impact on your repayments.
3. Building and Pest; We’ve found the one, we are ready to negotiate with the agent, we are ready to play hardball! But first, we must conduct a Building and Pest Inspection. Now this is a NON – NEGOTIABLE! A Building and Pest inspection will usually cost around $450. This $450 report can save you from making a $500,000 mistake!
I am constantly amused, baffled and scared when I see people purchase property without having this report done, this is perhaps the single most crucial step in the entire process.
I have found properties that are simply amazing, ticks all the boxes, we do a routine Building and Pest inspection and find live active termites, huge leaks underground, walls rotting from damage on the inside. The house isn’t going to stay standing, $450 report saved over $1.5 Million
Don’t be surprised if you have to do more than one of these on a few properties, but lets keep it at just one for this scenario.
4. Solicitor/ Conveyancer; When purchasing a property, you must engage the use of a solicitor or conveyancer. They look over the contracts, they make sure you are buying what you think you are buying, performing searches and other work, and they are there to sort it all out on settlement day too.
Solicitor’s and Conveyancers can vary in price but for the most part they cost approx. $2000 (Depending on what searches etc is needed this price may go up or down slightly).
5. Holding deposit; We found the property, we have performed our building and pest inspection, we negotiated and agreed on a price, now we enter into what is known as a cooling off period.
To enter this period, we then pay 0.25% of the purchase price as a holding deposit. In this example this would be equal to $1250.
The cooling off period is 5 days (usually, this can be negotiated also) where you are given time to “cool off” and understand what you have just purchased. In this time, your solicitor should be ensuring everything in the contract is finalised and agreed with the vendors solicitor. Your Broker should be ensuring and securing your finance during this time also.
NB. THERE IS NO COOLING OFF AT AUCTIONS (SKIP TO STEP 6)
6. Exchange of contract; It’s now been 5 days since we paid our holding deposit, we’ve “cooled down” and ready to commit to this purchase. Contracts are exchanged, signed and a 5% deposit is payable (5% is also negotiable). On our $500,000 house our deposit is $25,000
At auctions, we go straight to this step and pay the deposit (often 10%, again negotiable)
NB. Step 5 and 6 deposits are deducted from the deposit amount owed, and the purchase price, but you need this cash available to pay)
7. Buyers Agent Fee; If you engaged a Professional Buyers Agent to act on your behalf, (we strongly recommend First Brick Property Buyers Agency) The BA fee would be payable after exchange of contracts
8. Insurance; Building and Landlords insurance is now organised. We recommend that you have your insurance start a few days before you settle, just for caution and added security. Depending on various factors the insurance costs will change but this can be approximated to $1500.0
9. Settlement; Finally, we have reached the day we get the keys to our property!
At settlement the balances are paid,
- The initial deposit is now taken (our 10% from step 1)
- Stamp Duty is payable (in this scenario it is equal to $17,932)
- Mortgage fees are payable (Fees to set up the loan and paper work etc..) $500 – 750
- LMI is added to the loan if this is applicable
- Solicitor Fees are paid
- Any council rates, water rates etc.. are apportioned and will be payable. (allow up to $500)
So lets take a look at what this $500,000 property is going to really cost us to purchase it
As mentioned above, rates fees can be payable here as well as LMI and some other costs. Some other fees may become applicable if there are repairs needed etc.. However the purpose is to show the minimum needed capital to enter the market
$73,132 is the amount needed to hold a $500,000 asset. This is the power of Leverage.
There you have it Folks!
You are now informed and equipped with the tools to work out the costs associated with purchasing a property and the process along with it.
Want to calculate how much money you need for a deposit and work out your loan repayments with a few simple clicks?
Check out this awesome FREE APP we use on the daily
Property Calculator Australia APP Download link
Android - https://play.google.com/store/apps/details?id=com.propertycalculator&hl=en
Apple - https://itunes.apple.com/au/app/property-calculator-australia/id1048864391?mt=8
Want help finding your next investment or home?
If you are looking for your next investment property or home First Brick Property Buyers Agency can help you!
Here’s 4 ways we can help you
1. Strategic property planning and advice – Every successful property portfolio starts with a plan. We help you build a property plan, completely tailored to your needs then help execute it
2. Nationwide buyer’s agency service – We are completely borderless! This means we don’t just stick to one city; we search nationwide for the best suburb for you and your needs and your plans
3. 100% independent – We work for YOU. We don’t do deals with developers or agents which means when we recommend property for you, it is completely situational for your needs. Its all about YOU. Of course, we have relationships with agents which help us get access to off markets and get deals over the line, but we don’t receive kick backs or payments from any other industry professionals.
4. We save you Time, Stress, Money – We take care of the entire process so that you don’t have too. We do the planning, the research the negotiations, we do it all.
We don’t just leave you in the dark though, our mission is to educate and ensure you learn along the way so that you are always in the loop and furthering your own knowledge and empowering you to make decisions in the future.
Through our extensive research, we GUARANTEE that we will outperform the average investor.
Did you know the difference between a property that provides 5% capital growth and 6% capital growth compounded over 25 years is over 1 MILLION dollars? Don’t leave 1 Million dollars on the table
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