Do you fancy a new property in your stocking this Christmas, instead of another packet of socks again? Then you’ll have to do it yourself, but it’s very possible to go from an owner-occupied homeowner to a property investor.
Over 2.2 million Australians invest in at least one property, according to the Tax Office, and it’s generally considered a pretty safe investment overall, averaging returns of 10.2% p.a. in the 20 years to December 2017, the ASX says.
Whether you want to buy another home as an investment property or turn your current home into one, here’s how you can do it and what you need to consider.
What to consider when buying an investment property
It’s often the more beneficial option to buy a second property as an investment property: You could like your current home and don’t want to leave it, your current area might offer a worse rental yield than somewhere else, or there could be a better opportunity for capital growth elsewhere.
Do you have enough equity to buy?
If you’ve already paid off a decent chunk of your existing home loan, you might be able to take out a second home loan more easily using your existing equity. This is basically the difference between the current value of your property and how much of it you owe - higher equity means you’ve paid off more of your existing home loan, and can put this money towards a deposit for a second property.
Lenders generally allow borrowers to access up to 80% of their property’s value to put towards a deposit, and you’ll still need up to 20% to avoid paying Lenders Mortgage Insurance. This can be a more cost-effective and quicker way of buying a second property without having to build up another deposit through savings.
Calculate your usable equity here
Do you need the property?
You should generally have a reason for buying a property. Are you investing for the long term or the short term? Looking to make capital growth? Or earn a rental income while getting ready to move into the house one day?
Knowing why you’re buying a second house can help you find the right one.
Where should you buy?
Different areas and types of properties have different rental yields and capital growth opportunities, and you should research these thoroughly to see where the best area to buy is. If you plan on living in the property someday, then you should also consider buying in an area where you could see yourself living, but if not, then focus on getting a regular, high rental income and good long-term capital gains.
You can order a free property report from loans.com.au to get a list of recent sales in the area and to see the kind of potential it might have.
Can you afford the second property?
Buying an investment property could end up being a poor investment if you can’t afford it. Remember, you’ll have two sets of mortgage repayments to make, not just one, and while the interest component of an investment property is tax-deductible, you still want to avoid overstretching your budget.
Have a backup plan for instances where you lose your job, have to pay for an emergency expense or interest rates increase, and you’re suddenly faced with the prospect of struggling to meet the repayments. But most of all, be sure you can afford the home in the first place.
See 15 things to consider when buying your second property for more info on the key questions to ask before buying an investment property.
What to consider when turning your current home into an investment property
You can also choose to turn your current home into an investment property and buy a second owner-occupier property to live in elsewhere. This is also a valid strategy and works much the same way.
Are you renting out some or all of the property?
You might choose to rent out part of the property and continue to live in a part of it, either temporarily or permanently. If you have a granny flat, you can rent it out and you may be able to take out an investment loan on that portion of the house while treating its costs as investment expenses. Speak to an accountant if you do this to work out how it would affect your income tax and capital gains tax liabilities.
Find out if you qualify
Before making any changes to your living arrangement or applying for any loan, find out if you could even qualify for an investment loan first. You can do this by seeking pre-approval for an investment home loan to see what you could reasonably afford to borrow.
Consider your emotional attachment to the home
You might have grown quite fond of your home, and in this case, you should consider if it’s still the right call to turn it into an investment property and live elsewhere. Ultimately, your head should rule your heart when it comes to property, but you don’t want to make it to difficult to leave your home.
You should also consider if someone else would become attached to the home. Presenting it in the best condition you can would help make sure they stay on as a tenant, or one day even buy it off you.
Use our Smart Booster Bundle when buying a second home
The final key step towards becoming an investor is to get the right home loan. After all, the home loan you choose will make thousands of dollars difference to your overall loan cost.
If you already have a loans.com.au owner-occupier home loan and are considering buying an investment property, then our Smart Booster Variable Investment Bundle could be the home loan you’re looking for this Christmas. This home loan bundle gives you a discounted interest rate if you already have an owner-occupier property with loans.com.au, so if you’re taking out an investment home loan, you could save thousands thanks to its extremely competitive interest rate.
As long as you have a 20% deposit ready, you also get:
Don’t end up with a lump of coal under the tree - start saving thousands on both your investment property and your own home. Talk to a loans.com.au lending specialist today to get started.
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