Saving money in property investing: the costs to avoid and the habits to maintain

With an almost ‘perfect storm’ environment in the Australian residential property market at the moment, there is a new generation looking to get in to the real estate investment market. Many first time investors will not always be aware of which costs really should be paid, and those to avoid.

This is because few first-time investors actually calculate on a spread sheet their overall initial and continual commitment costs to a property in relation to the return it is giving them. This is high-risk because if you do not know the costs associated with procuring investment property, you could be building a portfolio that reads well on paper on weak foundations.

Successful investors know that minimising all unnecessary purchase (or acquisition) costs is one of the most crucial things they can do. Remember, a dollar saved here and there is a dollar re-invested later on when you wish to grow a small portfolio into a big one. And, as we know, a dollar invested will ultimately return bigger dividends, and this compounding effect is what really enables a portfolio to accelerate in the early years.

So today I thought I’d draw on some personal experience and share with you some ways to avoid paying unnecessary up-front and ongoing costs on an investment property. Remember, good habits formed when starting out will help you throughout your investing career will pay dividends when you really ramp things up in a few years’ time.

In some instances, saving even one thousand dollars up front can make the difference between having a good investment property in your portfolio that can unlock future equity access and one that weighs down your portfolio, costing way more than it should to hold.

It is also important to note the economies of scale that can be achieved when employing some of these capital-saving strategies. Why? Because the more exponential saving you can make as you add properties to your portfolio; the more exponential growth you will get.

Avoid lenders mortgage insurance (LMI) – At (and excuse the pun) all costs!

This is absolutely dead money that should never be paid, no matter if you are a new investor, or a seasoned investor holding dozens of properties. If your deposit isn’t enough to meet that 20% threshold for the property you wish to purchase. I recommend to re-think your strategy and opt for a more affordable property that still presents similar gains offerings, but allows you finance at 20% deposit, not 12% or 15% deposit.

There will be others who will disagree with this stance on LMI arguing that paying a small amount of LMI on a property loan can get you in to your investment property sooner. However this exposes you to much more risk. Say you pay the LMI and instead of saving 20% deposit, you save just 5%. Should you fall on tough times and need to unlock some equity in this property to use elsewhere, you will not have the flexibility to do so, with such a small deposit remaining in the property. The costs involved to restructure your mortgage at this point could be substantial.

Find a good conveyance/solicitor and ask about return customer rates

Finding a good solicitor who can work efficiently and does not cost an arm or a leg is an important part of the property investment process.  However, few investors consider the value they actually add to a solicitor as a repeat customer. It is therefore worth asking and potentially negotiating up front, if they offer discounted rates for repeat customers.

When selecting a professional, you should mention up front that you are a new investor with very big ambitions and are looking for a conveyancer who can help you grow a large portfolio. You may be able to negotiate discounted professional services rates for successive new property purchases

Get professional independent valuations, not just bank’s internal ones

Oftentimes in business, in order to save money, you need to spend money. Many times throughout your investment career, you will need to refinance properties to draw down on the equity created in your portfolio, to enable you to acquire more properties. Every time you do, lenders will need valuations done to prove that the properties have increased in value. Inexperienced investors are easily fooled by the lender they go with offering a free valuation by their internal team. This however could cost you money in the long run. More often than not, lenders’ internal valuation team will low-ball property values, in the pursuit of protecting their company’s bottom line (not yours).

Paying a small amount (say $50-$200 depending on the property) for an independent valuer to review your property, will pay big dividends. For instance, a lender’s internal valuer may only appraise your property at say $255k, whereas an independent valuer might give a higher valuation like $265-$270k. The small outlay cost of an independent valuation has just added potentially $10-$15k of additional equity, and that is enough to cover the closing costs on your next investment purchase!

Source a specialist accountant or one who is experienced in property investor clients – don’t do it yourself

In the same vein as above (spending some money to make or save you a stack of money); if your strategy is to acquire dozens of properties and hold them over a long time, you need to plan in advance your taxation minimisation strategies by speaking with professionals who are experienced to guide you in doing so.

Many new and inexperienced investors who have just one or two properties think they can do it all themselves (the tax minimisation part, I mean). And maybe for that first couple they can. As you grow the portfolio, however, you could have made structural mistakes in setting up the first ones that will hurt you later on as you grow. Smarter instead to pay a professional who will uncover tactics that could save you thousands of dollars you may not have realised that you could have saved, by doing it yourself.

Land tax – the tax that sneaks up on you

As above, a good accountant will work with you in regard to land tax minimisation and avoidance. This is a big – and highly unnecessary – cost that investors face and really should not pay. Well, at least for the first couple of dozen properties.

For those not in the know, land tax is accessed every December for investors and is payable every year; meaning that if you qualify to pay this tax it is not a one-off payment. You can imagine how that annual payment could hurt your bottom-line over five, 10, or 20 years of property holding. The tax is payable when the value of the ‘land’ of all your owned properties in a given state or territory, exceeds a certain threshold, for that state. For instance, in NSW the current annual threshold is $406,000. This means that if the value of the land parcels that each of your physical dwellings sits on top of (i.e. not the dwelling value itself), is higher than this amount, added up, you are up for extra tax. This tax varies per state also.

Best way to avoid it? Structure a growth acquisition strategy that ensures a multi-state approach (spreading your taxation ‘risk’), as well as multiple-dwelling-types approach. For instance, units in large blocks of hundreds of units, have minimal land value, because the percentage of land value each unit owner is entitled to, must be divided up between many other occupants. However, smaller blocks of just, say, six units, in very land-value-high suburbs will likely have a much higher land-value per owner and this will push up their land tax closer to that threshold.

As a rule of thumb though, and taking the abovementioned NSW example in hand, you’d likely be able to own around six to seven modest or average units (in line with general median unit prices in NSW state, encompassing Sydney and all other regional areas), before breaching that tax threshold. Still, this is generic only and something you need to investigate with state taxation offices annually.

Needless to say, if you are only acquiring houses and not units or apartments, in just one state, land tax will become a serious concern for you and a cost that over time, will really hurt your bottom line.

Buyer’s agents aren’t always a good idea

Buyer’s agents have a paramount role in the real estate industry. For home buyers, they enable people who have very specific suburb/dwelling/pricing needs to access more appropriate properties, and usually before they come on to the market. For starting out investors, they enable time efficiencies by taking on many of the due diligence items you’d have to carry out yourself, if you didn’t have them on board. So, for the time-poor, amateur property investor, I do not doubt a buyer’s agent’s value add.

With that in mind; the costs are very high, in regards to the fee they charge for their services. Again, when starting out, this may be a justified cost because the buyer’s agent may get you a deal where the cost or equity saving is greater than their professional fee for doing so. However, over time, as you move on to the second or third property purchase you’ll have been around the traps long enough to have confidence to procure properties without a buyer’s agent. Or, at least you should. We are all time-poor these days but if you want to be a successful and profitable property investor, you need to know how to do the due diligence yourself, have confidence in that ability and avoid paying someone else to do that for you.