Understanding Costs

Understanding Costs

When purchasing a US investment property, there are certain expenses involved we want you to be aware of beyond the price of the property itself. These costs are broken into the following three sections:

  1. Set-up costsSet-up costs include the price of setting up your LLC, accounting and tax requirements, and any other associated costs. Note: many of these costs are a one-time fee that will not be required when investing in additional investment properties beyond your first.
  2. Purchasing CostsThis includes the cost of the property you purchase and the “closing costs” which are all of the associated costs in completing a real estate transaction in the US.
  3. Ongoing costsThis includes the recurring monthly and yearly costs involved in managing and maintaining your investment. Note: Some of these costs are effectively reduced with each additional property you purchase as you gain economies of scale in your investment portfolio.

Set-up Costs

American Properties Membership = $1995

LLC set-up costs = Varies by state but entry level is approx. $500
Accounting costs = Varies by complexity but typically $900 for first year, $650 for subsequent years

Purchasing Costs

Purchase price = Cost of investment property

Closing costs

  • Title Agent fees = $300-$500
  • Transfer Tax = $300
  • Property Tax = Half of yearly rates, approx. $600
  • Miscellaneous Costs = $100

Optional closing costs

  • Legal representation = $400
  • Property Inspection = $100-$250
  • Title insurance = $250-$300

Ongoing Costs (yearly)

Property Management = 10% of monthly rent

Property Insurance = $400-$1,000

Property Tax = $1,000-$1,500

Yearly tax return and accounting fees = Approx. $900 for first year, $650 for subsequent years

Optional allowances:

Repairs and Maintenance = 5% of rental income

Vacancy allowance = 5% of rental income

Note: All of these numbers are intended to be a guideline only, actual costs may vary.

Example Purchase

Let’s run through an example of a typical purchase and analyse the costs. To make things easier we’ll use round numbers and assume that our investor is using cash to purchase a property for $100,000 that rents at $1,000 per month.

The investor’s start-up costs would total $1995 for his American Properties membership and $500 for his LLC and $900 in accounting fees.

Total start-up costs = $2,395

The purchase price of the property is $100,000 as stated previously. In addition to the mandatory closing costs as outlined above our investor opts for a $200 property inspection and $300 title insurance. The mandatory costs consist of $400 in title agent fees, $300 transfer tax, $600 property tax, and $100 in miscellaneous costs.

Total purchase costs = $101,900

Total combined cost of start-up costs and investment purchase costs = $105,295

In order to manage and maintain the investment property, we need to consider the ongoing costs as outlined above. The monthly rent is $1,000 per month, which equates to a rental income of $12,000 per year. Of this rental income 10%, or $1,200, goes to his property manager, $800 for property insurance, $1,200 for property tax, $450 for filing of tax returns, and our investor chooses to make allowances for both vacancy at 5%, or $600, and repairs at 5%, or $600.

Total Yearly ongoing costs = $4,850

Now that we have identified the annual ongoing costs, we need to consider the yearly income of $12,000. By subtracting the yearly ongoing costs from the yearly income we arrive at the yearly positive cash flow figure.

$12,000 – $4,850 = $7,150

Total Yearly cash flow after all expenses = $7,150

To summarize;

Our investor purchased a $100,000 property in the USA. In total, after all set-up and purchase costs, the total investment costs $105,295. Every year the investor receives $12,000 in rental income and budgets for $4,850 in ongoing costs, resulting in a yearly positive cash flow of $7,150. This represents a 6.8% net yield which is towards the lower end of available net yields, but fine for this example

If this is unclear or confusing, or you have any questions – please give us a call at 1800 642 144. We’re here to help!

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