Underestimating the full cost of purchasing a property
One of the biggest mistakes we make as investors is underestimating how much it actually costs to purchase a property. To make it more confusing the Inland Revenue Department specify that some things associated with purchasing a property cannot be expensed therefore potentially costing you even more.
Many people forget about the small things which add up when purchasing property. If you have $40,000 saved up, that does not give you a 10% deposit for a $400,000 house. You need to think about the other costs involved in purchasing the property that will be a cost to yourself.
There is always a cost involved in finding the property: from petrol, to telephone and internet costs you cannot find property without incurring some sort of cost. The once you have the property under contract there are many due diligence factors that you must take into account. With building inspections and valuations costing around $500 each you could have easily just knocked out $10,000 of purchasing power. Of course then you have to take into account paying insurance up front, there goes another $800, lawyer’s fees – $1500 do you need to pay any borrowing fees or low equity premiums – another $1200 you can easily incur costs of $4600 before you have even paid the deposit. If the property needs renovating it can cost you to get quotes, if you are renovating the property yourself then there is a time cost involved, not to mention the cost of having the property sitting vacant. Most successful investors use forms for everything in property and that includes having a form that calculates the complete cost of purchasing the property. These can be a lifesaver when it comes time to settle.
Another thing to take into account is, until you are considered to actually be in the business of investing in property, things such as education, travel costs associated with viewing properties and finding property, telephone and internet expenses associated with finding property will not be tax deductable. On top of that once you have found the property, things such as builders inspections, valuations, any specialist reports, lawyer’s fees will not be considered an expense either they will be considered to be part of the cost of purchasing the property.
Additionally if you do any repairs, renovations or maintenance to the property immediately upon purchasing it, you will not be able to expense these as the IRD considers that you paid a cheaper price for the property due to its condition and therefore the money you spent doing it up is part of the cost of returning the property to a market value and condition and therefore must be considered as part of the cost of purchasing property.
There are a lot more costs involved in buying a property than many investors first realise and it is important to take them all into account. Create yourself a form to use so you can successfully calculate the total cost of buying your next investment property.