What Are Operational Expenses and What Are Their Costs?

Investing into the real estate sector is often seen as attractive. This is because properties gain value over time and are not very vulnerable to macroeconomic fluctuations. 

Many people consider the option of buying property and face operational expenses associated with the transaction. However, not many people are aware of these expenses. The architect and general manager of real estate Exxacon, Nicole Solé, explains that expenses are the amount that consumers pay when buying a property. This is regardless of whether the property is a house or apartment and if it belongs to new real estate projects or if it is a used property. Its purpose is to cover the costs that are incurred when contracting third-party services that make the transaction possible. 

These are what operational expenses are, specifically:

Appraisal

The real estate appraisal in Chile refers to the calculation of the market value of real estate. It is carried out by an expert taking into account different factors. These factors include the location of the home, antiquity, capital gain, data of the latest transactions, etc. Financial institutions demand it and do it with their suppliers to grant a mortgage loan or a housing lease. It has a cost that ranges between 2 UF and 4 UF, depending on the value of the property. 

Title Studies

This is the analysis of the property’s legal background; it verifies that the domain qualifications are in accordance with the law. Its cost corresponds to the fees that a lawyer receives for conducting the study and its value can reach up to 8 UF (a unit of account used in Chile). It is always advisable to do a title study before buying a property, and it is required by financial institutions to grant a mortgage loan.

Writing a Draft

This corresponds to the fees that a lawyer receives to prepare a draft of the sale. Its cost ranges between 2 and 5 UF. 

Notary Fees

When making a real estate investment, be it through mortgage credit or with cash payment, it is necessary to pay the authentication of the notary signatures. Its value is between approximately 2.5 UF and 3.5 UF. 

Stamp Duties

This is a tax applied to documents or acts that involve credit operations. According to the SII (Servicio de Impuestos Internos) it corresponds to 0.8% of the value of the mortgage loan. However, in homes subject to DFL2 (up to 140 square meters) the figure is 0.2%; those of social interest are exempt from this liability. It should be taken into account that this tax is directly linked to mortgage credits. Sellers and / or executors of real estate projects have nothing to do with this. It is the notary’s office that is responsible for retaining it and declaring it to the State.

Registration of the Real Estate Under Conservatorship

This is the operating expense associated with real estate investment in Chile as it accredits the new owner. It is done after signing the deed by all those in the conservatorship of the commune where the real estate is located. It must also have an approximate cost of 0.2% of the sale price of the property for each registration and with a cap to pay for each of them of $ 262,200. There is an additional cost of $2,600 per copy added and about $ 5,000 for each certificate issued. In the case of the purchase of a property with mortgage credit, several registrations are made, since apart from the registration in the property register, it must also be made in the mortgage registry and in the prohibitions registry. The total cost of the conservator can reach for these cases up to 0.8% of the property value of these places.

In addition to the operational expenses described above, the following costs should also be considered. 

Tax and Fire Insurance

Regarding insurance, it is mandatory to obtain fire insurance when getting a mortgage; there is also the optional earthquake insurance. This cost is covered by the credit beneficiary and the value may change depending on the price of the property and the level of risk. Generally these insurances are included in the monthly dividend in the case of acquiring the property through mortgage financing. 

Start-Up Fund

When new homes are purchased under the real estate co-ownership regime, a community start-up fund must be provisioned. This cost is paid directly to the building administration and generally does not exceed a common expense monthly payment. The purpose of this fund is to grant working capital to the community to initially finance a good operation. 

The general manager of the SmartLiving real estate agency adds that operating expenses range between 0.7% and 1.2% of the property value. “We must bear in mind that, in cash payments, it is not necessary to contract the appraisal or the study of securities, although it is the most advisable to avoid scams,” he concluded. 

Disclaimer:
Translated from ‘¿Qué son los gastos operacionales y cuáles son sus costos?‘