What to consider when buying a second property
Buying your own home remains the great Australian dream – and purchasing a second property may help you take your wealth further. Whether you’re building your property investment portfolio, securing your business future, buying a holiday house or supporting a family member, there are plenty of things to think about before you take that next step.
Consider your cash flow & the deposit requirements
Property tends to be a long-term investment, so do your sums to make sure you can afford the ongoing repayments on two mortgages as well as provide adequate cash upfront for the deposit and stamp duty.
It is worth strategising upfront whether you will be financing the purchase within your superannuation (as an SMSF) or outside of superannuation. Generally speaking, if you have less than $200,000 in your superannuation, approaching the investment purchase outside of an SMSF is probably going to be advisable.
You will also need to consider whether you wish to purchase residential, commercial, industrial or rural property. As a general rule of thumb, one can gear residential property very highly, however, commercial, industrial and rural property will typically be limited to between 50-70% maximum LVR (with occasional exceptions).
Also think about any major life changes on the horizon. For example, you may be planning to expand your family, or you might need to support a parent in the coming years.
Get to know the market and location
Research what’s happening in the current market and whether it’s the right time for you to buy. Property data providers such as CoreLogic can provide automated valuations and full property valuations (NB: If you’re using Naritas to arrange your finance you may be entitled to such reports for free). Similarly, research houses such as SQM Research can provide excellent statistical reference points.
Get to know the area you’re considering by speaking to local residents and real estate agents. It’s also wise to look into the short and long-term planning for the area. For example, nearby construction may affect your ability to find a tenant.
Investigate the returns before you invest
If you’re buying a property as an investment, carefully consider its location. Buying in a high-demand area is likely to see you enjoy a constant flow of income from the rent.
You’ll need to provide your lender with a rental estimate letter, which you can get from the agent managing the property. Keep in mind that generally lenders only take 50–80% of the rental income into account when calculating whether you can afford the loan. It is also worth noting that serviced apartments, holiday & short term rentals (such as AirBNB) may cause you to be considered a business borrower or impair your ability to gear the property to a high LVR depending on what is being proposed.
For commercial property purchases pay attention to who the linchpin tenant is in the building or centre as well as the quality of tenants in the adjacent area. High quality linchpin tenants such as major public companies and white collar service professionals bode well for verifying the buoyancy of rental demand.
Choose the right financial structure
The amount you can borrow and the type of loan you choose will depend on various factors, including the equity in your current home, your income and expenses, and your property valuation. It helps to get quality advice on the right mortgage for you, along with other considerations such as negative gearing, and how to structure your loan to maximise tax effectiveness. If you’re concerned about the tax implications of the proposed debt it is important to choose a credit adviser who has the experience to work in concert with your taxation and legal advisers.
Whatever your reason for considering a second property, being well-informed will ensure a smoother purchasing process and a financially secure future.
How do I get assistance with getting approved?
The team at Naritas are experts in delivering timely guidance & finance approvals. We have over 100 lenders on our panel & a high quality team of dedicated advisers to steer you efficiently through the approval process.