Blog Steps to convert your home into an investment property

Steps to convert your home into an investment property

16 September 2020
Steps to convert your home into an investment property

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When you think of ‘buying an investment property’ most people would think of buying a separate one, whether that’s as a rentvestor when buying your first home or buying a second property and renting it out to help pay for your own mortgage repayments.

But actually, there’s another option, which is turning your current owner-occupied property into an investment property and buying a new one to live in. Or, just renting out a part of your current home and remaining in the other part.

Here we’ll walk you through what you need to consider when turning you home into an investment property.

Steps to turn your home into an investment property

The actual process of turning your home into an investment property is relatively simple, and mainly involves making sure you aren’t living in the part of the home you’re renting out (whether that’s a room or the whole house) and turning your owner-occupier home loan into an investment one. Speaking to your lender about switching to an investment loan will get this part of the process done relatively quickly.

Find out if you qualify first

Before applying for any sort of loan and making any changes to your living arrangement, find out if you could even qualify for an investment loan first. Find out if you can pre-qualify for an investment home loan to see what you can and can’t afford to borrow.

Make sure you can afford it

By turning your existing property into a rental, or by buying a second property, your living expenses are likely to increase. While you’ll be getting some rental income, you may also have to pay for:

  • A slightly higher investment home loan interest rate in some cases;

  • Two home loans if you buy a second property for any reason;

  • The fees and charges associated with buying a new home and changing home loans;

  • Potential renovating and property management costs if the place is inhabiting tenants;

And other costs. While there are tax benefits to owning an investment property (see below), you’ll still likely have increased expenses, and the last thing you want to do is fall into mortgage stress. So draw yourself a detailed budget beforehand and consider speaking to a financial planner or lending specialist.

Work out the tax implications

There are some tax benefits to turning your home into an investment property. For one, you can write off many things as a tax deduction since they’re classed as “investment expenses”, such as:

  • The interest component of your loan;

  • Agent and property manager fees;

  • Advertising to find new tenants;

  • Bank fees and loan charges;

  • Body corporate fees, cleaning costs and council rates;

  • Repairs and maintenance;

  • Travel and car expenses for rent collection or inspections;

  • Costs incurred for the inspection or maintenance; and

  • Depreciation losses on newly purchased items etc.

At we always recommend that our customers get independent tax advice. Tax advice is important to find out what the best structure is for your own personal circumstances when purchasing an investment property.

Work out what your rental income will be, and if you’ll be negatively geared

Another tax benefit to turning your home into an investment property is negative gearing, which allows you to deduct any rental income losses from your taxable income.

A property is positively geared if its rental earnings are higher than the cost of owning the property. While negative gearing can reduce your taxable income, you’re not actually making a profit on the property yet, not until you sell it.

Both investment strategies are viable, and ultimately, the long-term goal should be to make a large profit off the sale of the property in the future.

Are you leaving the home, or just renting out a part of it?

It’s actually not that uncommon for homeowners to rent out a part of their property and continue to live in it, saving themselves from having to buy and pay for a second house. If you have an extra bedroom or two, you can rent it out, and even take out an investment loan on that portion of the house while treating its costs as investment expenses (see above).

You should speak to an accountant as to how this would affect your income tax and capital gains tax liabilities. As your primary place of residence is now earning an income, you may have to pay some CGT when selling it!

It’s important to note that when your property is no longer owner occupied and is an investment property, you’ll need to notify your lender as different products may apply.

What about buying a second home?

Sometimes it’s the case that turning your current home into an investment property isn’t the best option, whether that’s due to poor growth potential in the area or it’s in an area where renters are less common. Sometimes, it might be more beneficial to just buy a second home as an investment property.

If you’ve owned your current home for a little while and have paid off a chunk of the loan already, you might be able to qualify for a second home loan more easily using your existing equity.

Use your home’s equity

If you do decide to buy a second home as an investment property, you can use the current equity in your existing home as leverage. Equity is basically just the difference between the current value of the property, and how much of it you currently owe. The more of your loan you’ve paid off, the higher your equity will be.

This can be a more efficient and cost-effective way of buying a second property. When applying for the second home loan the lender will still process your application normally, by assessing your income, expenses, credit history, your home market value, and borrowing capacity. 

Use our Smart Booster Bundle when buying a second home

If you already have a owner-occupier home loan and are considering buying an investment property, then check out our Smart Booster Variable Investor Bundle. This home loan bundle is for existing customers who take out an investment home loan for their second property with us as well, allowing them to unlock some super low rates in the process.

As long as you have a 20% deposit, you can access a 1.99% p.a. (2.71% p.a. comparison rate) on your investment property, as well as:

  • No ongoing fees

  • Unlimited redraws

  • Unlimited additional repayments

Maximise your investment and start saving thousands on both your investment property and your own home. Talk to a lending specialist today to get started.

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