Property investment comes with a few hidden extras that can sneak up on the unsuspecting purchaser, so it’s important to know what you’ll be up for when it comes time to close the deal.
We’ve put some resources together HERE that begin to scratch the surface of what you could be in for…
Closing costs vary from state to state, with the usual suspects including things like conveyancing fees and stamp duty, through to more specific purchase extras like body corporate adjustments.
Hence we can really only generalise when talking the extra cash required to complete your property transaction. It would be nice to think we could give you an accurate answer, however this is pretty much impossible because we until you receive advice from the other party’s solicitor, we still do not know how much the rates adjustments will be or indeed, how much your solicitor or conveyancer will charge for their services.
Having said that, there is a general rule of thumb that can be applied to closing cost calculations for properties with a price tag of less than the magical $1 million. Let’s face it, we’re talking a large financial commitment, so it’s good to have some idea of what you might be up for, on top of the purchase price.
When you find “the one”…
You’ll want to do some quick calculations to ensure you won’t fall short when it comes to making an offer, the safest option is to add on an additional 5% to the purchase price. This simple yet effective method of working out the additional purchase costs you’ll be up for should see you with enough change left over for a bottle of bubbly.
Note though that this will not cover your deposit, which needs to come from somewhere too. This might be from the equity you plan to release in your own home or another investment property, or your hard earned savings.
That magical 5% will also fail to cover you in the case of a low valuation; get one of these and you can be up for a considerable amount of additional money.
To help you out a bit more, here’s my easy reference guide that illustrates how to work out your closing costs with deposit, and then in reverse. By reverse, I mean if you have a certain amount of money to put down on the property, how much will that allow you to borrow in turn?
For this exercise, let’s assume the bank requires a 5% deposit and you need to come up with an additional 5% in closing costs. This means you would need an extra amount that is the equivalent of 10% of the property’s value in order to cover both the bank deposit and the stamp duties, etc.
So…
- 10% deposit and 5% closing costs equates to 15% in total extra funds to be contributed.
- 15% deposit and 5% in closing costs equates to 20%
- 20% deposit and 5% closings makes it 25%, and so on.
But how do you calculate this all in reverse?
Let’s say you have some money stashed away and you want to know how much you can borrow from a Loan to Value Ratio perspective, meaning no affordability is taken into account.
Let’s work with an arbitrary amount of say $150,000, which can be released equity or money that you’ve saved. Here’s the standard formula we work with, that you can use to see how much real estate you could potentially purchase. Remember this is without any affordability being taken into account…
A required 20% bank deposit and 5% closings = ($150,000/25) x 100, which means you can effectively afford $600,000 worth of property.
In this equation we have worked out that your initial amount of $150,000 would allow you to purchase $600,000 worth of real estate. The aggregated amount is $600,000 meaning that if you purchased two at $300,000 each and the values came in on contract, you would then be able to meet the required 20% deposit and 5% closing costs.
Again, it goes without saying, but this is purely from an equity point of view and not at all based on the question of affordability.
The same calculations using a smaller deposit…
A required 10% deposit and 5% closings = (150,000/15) x 100, which now gives you the capacity to buy $1 million worth of property, which might equate to a whole lot of house or perhaps two to three assets added to your portfolio.
Here is where I add a word of caution; if the aggregated amount goes beyond $1,000,000 then you need to check the exact calculations for stamp duty with your local State Revenue Office because in some regions, once you tip over that million-dollar mark the land transfer duty increases significantly.
What about in the instance where you’re using a buyer’s agent to source the perfect property on your behalf? How much extra should you account for then?
Well, assuming their fee equates to say 2% of the purchase price (which is a reasonable standard yard stick to go by) and you will require a 20% deposit and the same 5% as before for closings, then the calculations would change slightly…by 2% to be exact!
Hence all you do is add up the numbers, which come to 27, and this becomes your dividable.
So…($150,000/27) x 100 = $555,555, meaning you can purchase $555,000 worth of real estate and still ensure you have enough money left over from your initial investment of $150,000 to cover the 20% deposit, 5% closing costs and the 2% buyer’s agent fee.
As you can see, it’s really a simple case of applying your basic arithmetic lessons taught at school once you remember the magic number that is 5 per cent!
If you would like some assistance in calculating how much you can borrow from an equity or cash position give my team a call today. They will start by having a conceptual conversation to establish your position and then put our recommendations in writing for you. It’s what they do every day! You can also Schedule Your Free Consultation Online HERE.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).