Underlying Costs Of A Property Investment In Hong Kong
Are you interested in property investment in Hong Kong? Despite being one of the most expensive in the world, investors still consider the real estate market as an important part of their portfolio. According to an article published in the South China Morning Post, although investors are cautious of the price and supply of units, they would still consider buying a property for investment purposes. If given a choice, the gains from an investment will be used to buy a second unit to increase their income.
Truth be told, real estate remains to be one of the most stable investments. You can benefit from it through rental yields and as long as you can maintain a low vacancy rate, you do not have to worry about a return on investment. Apart from the monthly rental income, you need to include the increasing equity of the property in the equation.
As time goes on, the real estate value increases – more so in a housing market like Hong Kong. The high density, high prices and lack of affordable units force a lot of residents to rent a unit instead of buying one. If you have the money to invest, you can take advantage of this.
If you want to buy a property investment in Hong Kong, this is probably the best time to do it. The data from the Global Property Guide revealed that the residential property index went through its sharpest decline during the first quarter of 2016. The drop is 7.31%. While the rate is steadily increasing, you may want to take advantage of the current rates to invest in a property in Hong Kong.
But before you do, make sure you consider all the costs involved in property investment. Take note that the cost of a rental property goes beyond the price of buying it. There are various fees and charges to consider.
4 transaction costs when you buy a property investment
Let us start with the transaction costs of a property investment. In Hong Kong, you need to consider 4 important costs.
This is the tax that you will pay for buying a property and having it transferred to your name as the new owner. This is usually a percentage of the value of the property. The stamp duty rate will depend on what price range your property falls under. The range according to the buying guide from the Global Property Guide is between 1.5% to 8.5%. While the buyer and seller shoulders this cost, most of the burden goes to the buyer.
Special stamp duty.
This was only added by the Hong Kong government in November 2010 to discourage homeowners to sell their property shortly after it was bought. At the moment, you cannot sell your property 2 years after you bought it. In case you do, there is a requirement to pay a special stamp duty that is between 5% to 20% of the property value. Both the buyer and seller will be charged with this cost – but again, the bulk will be paid by the buyer – which could compromise your selling price.
This refers to any fee that you will pay towards the real estate agent, mortgage broker, etc. It all depends on who you hire to help you complete the home buying process. Usually, this is 1% of the property investment value.
Finally, you have to pay for legal fees. While you can opt not to hire a real estate agent or a mortgage broker, a lawyer is usually a must. You need their help to ensure that the property will be legally transferred under your name. They can help you with the paperwork and legal documents. Unlike the other fees, this is not reliant on the price of the property. It will also depend on the size of the law firm that you will hire. The larger the firm, the more you are expected to pay.
All in all, the transaction costs will probably cost you 3% to 20% of the purchase price of the property. Take note that higher the value, the higher the rate of the fees (specifically the stamp duty).
You need to consider these costs because these will be a part of what you need in your ROI (return on investment) calculations.
Tax obligations on rental properties
Apart from the transaction costs, there are also expenses that you need to consider after acquiring the property. These are mostly tax obligations that you need to meet for as long as you are a rental property investor. Here are some taxes that you need to pay off.
This is usually between 15% to 80% of the net annual rent (gross rent less costs of the real estate property).
This is based on any profit you will get from the selling of the property – if you sell it within 3 years after you bought it. You will be charged up to 16.5% for this transaction. Selling within 3 years will be considered a real estate trade. But if you let it stay for 3 years, it can be considered a long-term investment – in which case you will not be charged accordingly.
Apart from these two tax obligations, there are other expenses to be considered when you own a rental property investment in Hong Kong.
Maintenance and repair costs.
Admittedly, it is hard to identify the cost for this category. However, setting aside 1% of the property’s value should be fair enough. That means you have to save up for this while collecting your rental income. This will help you take care of expensive repairs or replacements that your property investment might require in the future.
This will help secure your investment. The amount that you have to pay will depend on your coverage. There is a policy for the contents of the house and there is a policy that covers your unit in case of fire or structural damage. Remember that the more comprehensive the coverage, the more it will cost you. In case you want to get an insurance for the content of the house, you may want to talk to the tenant about it – they may want to shoulder this expense. After all, this policy will cover their possessions.
It is a common practice to have a property manager handle your tenancy affairs but you do have the option to handle this yourself. The cost to hire this professional is usually a percentage of the rental price.
At the moment, rental yields in Hong Kong is just above 2% – again, this is according to the April 2016 data from the Global Property Guide. This rate would mean you will not get much profit from your property investment in Hong Kong. However, it is important to note that the property cycle of the region is currently falling – and it has yet to bottom out. It might be safe to say that it will still fall – but you need to hold on because what falls will rise again. Unless the costs are really dragging you down and you are having trouble with the tenant, it is advisable that you hold onto your property investment for now.
As mentioned, rental possibilities will continue to rise in Hong Kong because a lot of people will find it hard to buy a property. In fact, even public housing requires applicants to wait at least 3 years before they can get a unit. Since shelter is a basic necessity, they will look for rental units to live in for the meantime.
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