Buying a second home and renting out the first (or second) presents a significant wealth-building opportunity, but also the challenges of property management. Understanding the rental industry, landlord responsibilities, market trends, and target areas is crucial for your success.
Here, we explain how to buy a second house and make a profit, all from the experience of our experienced mortgage brokers. Read on.
Buying a second home with equity
Home equity (i.e. the disparity between your property’s value and existing home loan) can be instrumental in buying your second property.
Calculate 80% of your property value and subtract the mortgage to determine how much equity you have. For example, if your property is valued at $800,000 and you owe $450,000, your usable equity would be $190,000.
Contacting a mortgage broker is recommended to help you assess your borrowing power, factor in additional cash contributions, and address associated costs.
Buying a second home with equity offers favourable interest rates and eliminates the need to pay Lenders’ Mortgage Insurance (LMI). However, it’s important to remember that your existing property will be used as collateral for the new investment’s security.
How to choose the right investment property
Prioritise researching desired neighbourhoods and pinpointing a property with the potential for increased value and profitable rental earnings. For example, you might choose an established suburb, or an up-and-coming suburb with lots of infrastructure planned in the near future, making the area more attractive to tenants.
Consider choosing a second property that needs minor (but manageable) cosmetic upgrades and falls within your budget, preferably at most 12 times the projected annual rental income. Typically, single-family houses attract reliable, extended-term tenants, such as families or couples.
We recommend prioritising simplicity when you buy a second property. Instead of seeing it as a personal dream home, viewing it as an investment helps to make smart, objective decisions.
Selecting a property with basic features can also help minimise maintenance issues and avoid unnecessary expenses related to amenities like swimming pools, dishwashers, and air conditioning.
While certain add-ons can increase the appeal of a rental property, it is important to focus on the ones crucial for satisfying tenants and reducing the likelihood of problems and expenses in the long run.
How to attract the right tenant to your second property
One way to make a good first impression with tenants is by showcasing a well-maintained property with an attractive exterior. Think of a well-maintained garden, a fresh lick of paint on the fencing and facade, and even a garage for added convenience and storage.
Market the property at a reasonable and competitive price to attract a wide range of potential tenants. Building solid relationships with tenants can also be achieved through effective communication and prompt maintenance services. In addition, for outstanding tenants, offering extended lease options or flexible terms can help foster loyalty.
Calculating income minus costs
To gauge the profitability of your new property and landlord endeavours, compare expected monthly rent with mortgage repayments, factoring tax, insurance costs, and a maintenance allowance. The maintenance allowance should consider property features, self-management, or potential property manager engagement (including property management fees).
Seek guidance from a professional mortgage broker before you buy a second property
For advice on maximising landlord profitability, contact our team of experienced mortgage brokers at (02) 4018 7505 or contact us online today. We’ll provide all the lender comparisons, information, and advice you need to confidently grow your property portfolio and easily manage your investment loan.
Disclaimer: The information provided in this fact sheet is not legal, taxation or financial planning advice. It has been prepared without considering your needs, objectives and financial situation. Before acting on this information, we recommend carefully considering whether it suits your needs, objectives, and financial situation. All loan products are subject to lender criteria and approval. Fees, terms and conditions apply. Your full financial needs and requirements must be assessed before any offer or acceptance of a loan product. Licensing Statement: Watson Mortgages Pty Ltd Credit Representative 525053 is authorised under Australian Credit Licence 389328.
