What are the setup costs involved with buying a property?

Firstly here's my situation;

- I'm 21 and looking to buy my FIRST property.
- I have found a cheap little studio I'm interested in, where the asking price is $159,000, I would be hoping to purchased the place for $150,000.
- The property is typically banks wouldn't favor but I will have a Guarantor who will easily be able to back the loan up. (They own their home)
- I will NOT be planning to live in the property at all, but rather lease it back to the Company I am buying it off for $230pw.

My questions would be;

1. What other costs will be involved with getting everything set up? (i.e. Stamp Duty, Loan setup costs.)

2. Since I wont be living in the property for 6 months I won't be getting the FHOG, would this mean I forfeit it? Or could I use it on my next property?

3. Would I have to use/forfeit my first home owners benefit of not having to pay stamp duty?

Thanks.

And yes, I know typically investments like this have little or no capital gain, but with the way I've worked it out, this property will be positively geared from the moment I buy it. I really just want to get into the market asap and see this as a perfect opportunity.

 

if your looking for cash flow, why not invest into a unlisted property trust like cromwell?

Pays 8.5% monthly and owns direct commercial property.. allot cheaper to get into than that studio.

 

Well firstly I guess leverage... I'll be pulling this $150,000 from nothing, it will basically all be leverages against the property, and of course my guarantor.

Plus, who's to say I can't do both..?

Essentially this will be costing me absolutely nothing, it will be no money out of my pocket. The 'deposit' will be covered by the guarantor, and the interest+outgoings will all be covered by the lease. I'll just have an offset account on the loan where I store my money so essentially I'm making <loan interest %> untaxed on my money rather than like 6.5% taxed by keeping it in a savings account.

Basically, this will completely fund itself, so it wont prevent me from doing any of these other things, and slowly over time it will pay itself off due to myself regularly storing money in the offset account.

Its kind of like someone coming up to you and saying "Here have this property and I will cover all your costs."

 

Cost wise above purchase price - Solicitor Fees, Building and Pest Inspections, Home Insurance / Landlord Insurance, Council Rates, Stamp Duty, Bank Fees, Body Corporate, Initial security / deposit (if you put one down), Repairs/Maintenance, etc

PS. Either focus on cash flow or capital growth

 

Solicitor fees..? What do I need a Solicitor for..?

Building and Pest Inspection..? I don't really have an interest in that, I'm sure the hotel management deals with that, and if it does have pests, I don't really care, they'll be leasing the property off me for at least 2 years guaranteed.

Home Insurance..? I don't want home insurance, plus I think if its leased out to the management their it comes under their insurance, I'll be sure to check that.

Landlord Insurance..? I don't think I'll be needing that as I'll be signing a lease contract with management where they guarantee me $230pw.

Council Rates/Body Corporate/Maintenance, I believe will be paid by the management, all outgoings will be paid by them, including water and power. (If the lease is similar to another property I looked at which had quite a similar setup.) I'll be looking further into this of course before buying the property.

Initial Security/Deposit, I will be having a guarantor, they will be my security, I won't be putting down any cash deposit due to all my money being invested in shares.

So out of all those it seems to me only Bank Fees, and Stamp Duty would apply, I could be wrong though.

1. What are the bank fees for..? And roughly how much would the probably be..?

2. In regards to the stamp duty, how much is it..? Isn't it 3% of the value of the property?

3. Don't you also pay stamp duty on a mortgage? Or would that come under bank fees?

4. Since I'd be a first home buyer would I lose my FHOG because I'm not living in the property for 6 months, or could I use it on the next property I buy?

5. Also since I'd be a first home buyer, would I have to use my no stamp duty benefits..? Or again, could I use them on my next property? One which I would make my 'home' and live in for 6 months.

 

I had a client walk in on Friday and tell me that her guaranteed rate evaporated very quickly when the (mis)management company had gone bankrupt as they were actually forking extra cash in to get the guaranteed rate.

The contract won't help you much if the management company goes bankrupt...

Cheers,

Dan

 

I agree with AsxBroker.. you need to question why all these so called 'garrantee's are given.. if its a good investment, it should stand on its own two feet.

If your after cash flow, then commercial property is the go.. trying to make a residential property produce cash flow is forcing a asset to do something its not designed to do.

 

Well this place has been in the area for years, it's not like its just something brand new that's popped up over the past few months, so I doubt the company will go bankrupt. Although I will take a closer look at the contract of course if I choose to go ahead and see exactly where I would stand in scenarios like these.

Even if the guarantee were to fall through, I could still rent the place out and pay it off, of course it would be a little harder, but it would still be doable, however its not something I would like to happen.

I'll definitely look further into the company, how reliable they are, and the likelihood of them renewing leases within the building.

Well in this scenario I'm after umm... Hard to explain, I'm just after a property..? Something I can get into that will essentially cost me little or nothing, something that I will be able to pay off without putting money out of my own pocket, so that when It comes time to invest in bigger and better things I'll have some extra leverage.

Essentially, I can still do EVERYTHING you guys are suggesting as well as purchase this property. Provided the management were reliable, it wouldn't cost me a thing, I don't think you guys are taking note of this.

I want to get into the market asap, and this would be the perfect start as it would cost me NOTHING. I'd still have the ability to do EVERYTHING you guys are mentioning.

 

Sk3tChY you seem very focused on your initial plans without taking in the alternatives and views of what opinions are being raised.

Take a step back, review everything and you'll become a more informed investor.

 

I have never bought in NSW, but as an estimate you're looking at about $4k stamp duty, $1k+ conveyancing fees (settlement agent / solicitor), $650 loan setup costs through the bank, a few $100 for mortgage stamp duty + misc fees.

I wouldn't discard building/pest inspection, as damage will be a capital cost and is not likely to be covered by the regular strata fees. Budget up to $1k for these. Pest inspection is not just to see if the place has rats or cockroaches, but to see if there is structural damage caused by termites etc.

How sustainable is the rental at $230 per week? Regardless of the rental guarantee, could you expect to rent it at this rate on the open market? If you're not sure, make some enquiries with a local RE agent. If the rent is over market value (quite possibly, as neutrally or positively geared properties from day one are rare), then what hit might you take when the lease finishes in two years? And how would you manage your cashflow during any period that it's not rented, even a few weeks? or months? How much would you have to reduce the rent to make it attractive to the market?

Body corporate fees, covered by the company? This is not likely to be sustainable... how can the company pay you rent, and also pay for maintenance, gardening, council charges, water rates, etc? Ask what happens once the two year lease expires. It's very likely that you will be up for these fees, otherwise who's paying them? These are standard charges, paid regularly (eg quarterly), that are expected with any IP (for standalone residences - 'green title' in WA - you are liable for council/water rates plus land tax; for multi-unit 'strata' developments, these charges are apportioned across the owners).

(The seller might have said that they cover power + water, but this is likely to be the consumption bills, rather than the rates).

I reitierate vandalic's point: Please don't misinterpret the responses here sk3tchy, it seems that the probing questions being posed are not being negative on the idea, just making you reinvestigate the merits of this decision. And these are just my thoughts - as I said, I've never bought in NSW, but I do have a strata IP.

 

I'm not taking in the alternatives because I think people are beginning to miss the point here. This will be a positive flow IP from the start, it will quite literally cost me nothing, thus the reason in this case I'm not particularly interested in other alternatives, I just want peoples views on this investment only.

And I am taking in the valid points people are bringing up in regards to this investment plan.

I'm a first home buyer so I know I have some benefits which I think exempt me from stamp duty and the likes, would I forfeit them if I were to buy this property..? Or would I be able to use them on the next property I buy, which I offically make my 'home'. (i.e. live in for 6 months.)

Well in a similar property I looked at these sort of things were covered by management, they even covered insurance. So I'll double check on this, however if it is NOT covered, I'll perhaps consider these inspections.

Well the building is well established, and has been around for years, so I would imagine the lease would be quite reliable. Regardless, I'll basically be cutting down the loan instantly as I'll be sure to get an offset account.

If worst came to worst and the lease were to fall thru, I'd probably be able to rent it out for about $200pw I reckon, if not, I'd probably live in it for a while.

If the lease were to be sustained over the 2year period it would probably be safe to say I'd basically have paid half the property off, and not really have a care in the world if they were not to lease it again, I could probably sell it for what I bought it and still end out on top.

I'm not 100% as I haven't seen the lease agreement, but with a very similar property it was all covered, and in most cases with these types of investments they are.

I think because they're a business they may be able to write off all these costs or something, but yeah... All these things should be covered, and I'll definitely look into this further if I were to look further into the property.

What do you mean consumption rather than rates..?

Yes I do understand.

It seems the main concern everyone is bringing up is the reliability of this 2 year lease, and what will happen AFTER the initial 2 years is up.

I'd be looking into this if I were to go ahead with the plan, and would only buy it if;

1. Their lease was very reliable. (i.e. they always paid the weekly rent.)
2. They were highly likely to re-lease the property after 2 years.
3. They covered ALL outgoings. (i.e. Water, Power, Strata, maybe even insurance.)

If they met this criteria, I would be very interested.

So now, hypothetically say they did meet this criteria, would there be anything else I may want to be weary of..?

Provided

 

Your not a first home buyer, as your not buying a home, your buying a investment property, so you gain nothing be been a 'first home buyer'

 

I figured that, now my next main question, and probably one which will determine whether or not I look further into the property is;

If I were to buy this IP, would I lose all my first home buyer benefits..?

Or would I still be able to use them when I finally do buy my first 'home'.

 

You are best off clarifying with the government - First Home Owners Scheme

Although they could change the rules by the time you potentially buy a home to live in anyway

 

Hi Sketch

Good to see you taking action at such a young age- it's also wise to nut out your thoughts on forums such as this, as open discussions encourage review and analytical thought processes- all necessary before making any investment decision, I say

To address your questions:

1. Possible setup costs will include:

loan application fees (if applicable) range from $300-800 depending on lender

conveyancer/solicitors fees (necessary unless you're planning on doing the searches and conveyancing yourself which I wouldn't recommend, particularly for a first purchase) Allow approx $800-1300

mortgage stamp duty (if applicable) Please not that this duty is about to be abolished in July 2008 for IP's and has already been axed for PPOR mortgages in Sep 2007
See more details here 2007 State Budget changes - NSW Office of State Revenue

Building/pest inspection- depending on age and condition of building, it may be worthwhile still getting these done, as unforseen problems can turn up within the four walls of your dwelling (for which you are responsible for)
Allow $400-700

And the biggie, for which you won't get an exemption as it's an IP (but please clarify this with your accountant/adviser here or talk to someone at the friendly OSR office Frequent questions - NSW Office of State Revenue for further information regarding SD concessions in NSW) is good old mortgage (or transfer of land) duty Geez, I hate this tax!! It's a killer
Allow approx $3,700

Other costs to be aware of (but not included in setup costs as such) include:

PM management fees (usually vary between 5-9%)
strata/body corp fees (range widely from $300-$4K+ per quarter)
rates and water
insurance- contents and landlords (though your building may well be insured check that the policy covers fittings and fixtures as they usually do not)

2. Even if you don't reside in the property, you are still entitled to claim the FHOG further down the track, when you do purchase a PPOR. Read this factsheet for more information
http://www.osr.nsw.gov.au/lib/doc/factsheets/fs_fhb1.pdf

3. See my answer to this in reply to question 1

I second the other responses here re: management and leasing rights agreement. This is a document I'd have your conveyancer/solicitor check out thoroughly, as you don't want to be lumbered with a contract that leaves you high or dry or with little control over tenant selection etc. It's also important that you understand fully what a rental guarantee entails and that you're completely happy with the terms and conditions. Again, seek legal advice prior to signing anything.

My two cents

 

Hi Sketchy,

I am not quite sure what what it is you are buying into, a serviced apartment that you can also live in yourself or they rent out? If so, some additional things that you may want to check:

Often the rent back price is a gross figure. Hence body corporate fees, building insurance (which come out of the body corporate fee), and the management fee all come out of the gross $230 per week. The management company 'looks after it' simply by taking it out of the gross you've been promised.

If it is a managed unit aligned to a hotel / motel you may also need to check the fine print on the cost of upgrades. I have a friend who bought into one and basically the sinking fund part of the body corporate fees were minimal, so when it came to upgrading the rooms (including furnishings) all the owners were hit with a bill (I think it was around $20k each).

Also check for any re-sale conditions. You may only be able to sell through the management company, or their agent, and they may include a fee for allowing you to do so. Happens a lot in retirement villages, where they also take a percentage of capital gains, but it can sometimes apply to managed apartments linked with hotels. My friend, again got caught with this when the management wanted to do an upgrade (and they were able to stop resale to another party) - his only option out was to sell back to the management company with and effective loss of around $20k on a motel room that cost around $100k

Another thing to check is, if used short term rental / managed apartments, where is the GST being paid from? Is this out of the gross rent also? If long term occupants then this is not a problem.

Hopefully these 'down side' factors won't affect you, but please check the fine print of the sale and purchase contract, the lease-back / rental management contract, and the body corporate regulations.

Dave

 

hmmm...

sk3tchy...ive read what you've written, and whilst im new to this site i have some experience in both property and development. All im going to say is take in alternatives, dont harp on people for offering an opinion on the matter.

there is no such thing as a free ride mate, and there is no way it will cost you nothing....depends on the contract with the company.

just do your own research but im telling you now it will not just 'cost you nothing out of your own pocket', no IP does...unless you found a divorced man selling his home in order to stick it to his wife..haha.

have a look at things like departure fees. i.e. if the company has departure fees in place then it can take upwards of 15% of your final sale...if thats the case then what is the point of having such an apartment as an IP when you will lose out.

all im saying is there are much smarter alternatives, but it will cost out of your own pocket.

thats just my opinion...dont take it to heart.

 

hmmm if someone gave me iag shares for free i would be happy, however if that same person gave me cba shares for free welll id be VERY happy....

whats the point in buying something if its a dud because you can?

typically gen y thats all i can say (coming from a gen y himself)

 

welcome on board with your first post, monkey boy!
I was singing the theme song to Monkey today, and having a good laugh, and hoping it's going to return to TV or Foxtel soon.

 

Sketch,

Obviously you're pretty excited about this property, my only observations (being twice your age and never having had the foresight at 21 to look at property as an investment) is the opportunities you might lose if this studio isn't likely to make CG :

1. You're about to expend some effort and sunk costs to get into an IP
2. You've targetted one property mainly because of potential positive cash flow
3. This cashflow relies on a management agreement which isn't 100% guaranteed (and if the 'typical' agreement applies is likely to involve some smoke-and-mirrors to woo investors)
4. "Guaranteed rent returns" is one of the first warning signs investors see when considering an investment (ie. what barrier to purchase is the company trying to offset by buying your confidence?)
5. The characteristics of the property make it unlikely to grow substantially in capital value hence limited opportunity to use it for future leverage
6. Your borrowings on the property will count against your servicability for future loans (regardless of positive cashflow)
7. There is no substantial action you can take to improve this property's value
8. If you need to sell it, it will always appeal only to a small niche in the market

At such a great early start, I personally would be looking for a property that has :
a) the potential to be improved through some hard work (while you're young and up for it)
b) hopefully some better land value component (eg. a larger unit in an old block sitting on a good block of land) which might result in instant capital gain, and
c) rent returns which can be achieved without needing a management agreement in place, and as others have said, stand on its own feet without relying on the paperwork to justify it.

If you're going to expend all this initial effort you might as well make it on something that performs well in both growth and income.

Whatever CG you make can be used to back your next investment. Your loan repayments will help your credit worthiness when you go looking for more dough next time. If a property that doesn't have as many risks associated is going to cost money to support initially, the difference might be well and truly worth it in the long run.

Good luck with whatever you decide

Cheers
Carl