Planning to expand your investment portfolio by purchasing a second property? Good for you! You’ve done the hard work and possibly put yourself in a great financial position. So, what’s next?
While property investment is a great way to secure your financial future, multi-property investment can be challenging and needs careful thought and consideration. It’s not enough to have big dreams—you need to understand how buying your second property is different from buying your first in order to fully capitalise on your investment.
According to data from the Australian Bureau of Statistics, small-scale investors own 83% of all investment properties in the country. If you want to be one of the successful ones who have really turned a profit from multi-property investing, you need to be smart with your decision-making. We at Clever Finance Solutions don’t want you to enter the field unprepared, so we’ve come up with a list of things you should do before getting that milestone second property.
Review Your Finances
Before you start looking at different properties, you need to understand your financial limitations. How much are you ready to take on? How do you know when it’s the right time financially? When buying a second property, above all else, you should be in financial control of your first property.
While making current repayments is a good start, it’s also important to think about how long it will take to fully pay off your current mortgage and how much interest rate changes will impact your investment plans. Like many people, you could also use equity (the difference between the total value of your property and how much you still need to pay for it) from your first property to buy your second. The lesser the debt you owe, the higher the equity and amount you can borrow from the bank.
As for the highest property investment value you should aim for, the rule of thumb is four times your useable equity. You should factor in legal fees (e.g. stamp duty), which are usually around 5% of the total purchase price, and the deposit you can make. This gives you a more accurate estimate of the maximum amount you can realistically handle when getting another mortgage loan.
Prepare for Getting a Loan
Getting a loan for a second investment property is usually a necessity, and it can prove quite tricky. In order to increase the likelihood of getting approval, it’s important to ask yourself a few important question first, such as the ones below:
- Do I plan on using personal funds, my super fund, or a trust fund?
- How much useable equity do I have available?
- What is my credit rating?
- What are the assets and outstanding debts I currently have?
Your answers to these questions will have a huge impact on loan approval and the kind of loan you’ll get. Your income and current assets—from your first property to your cars and businesses—as well as your debts paint a picture of your capability to pay your monthly mortgage. As such, doing things like making sure you pay your bills on time and not maxing out your credit limit will have a positive effect on your application. It’s also important to consider property taxes and mortgage fees in order to meet the pre-approval lending criteria many lenders have.
Understand the Local Property Market
As we’re always told, location is critical when it comes to property investment. When choosing your second investment property, keep in mind that local property markets differ in many ways, with supply and demand constantly affecting prices, volume, and time on market. It’s not just about growth rates and rental or purchase demand, however—you also need to understand your target market.
Whether you want to rent out your property or sell it after doing renovations, you won’t get far if you don’t understand the needs and expectations of potential customers. Market research is crucial at this stage, so look into demographics, incomes, and lifestyle considerations relating to the people in your target area. Doing so allows you to better market your property, choose the right renovations to attract more people or, if need be, decide against purchasing property at a certain location because of certain factors such as not enough demand or dwindling employment/business opportunities (which negatively affects an area’s marketability) .
As we’ve pointed out in a previous blog, when picking a second property, it’s always better to choose one that appeals to a wider audience. For example, a property with a design that doesn’t involve unusual visual elements will likely be a safer bet when it comes to attracting more people. Having amenities that are in demand or usually not found in other properties is another way for your property to be preferred by more people.
Learn from your First Property
Choosing the right kind of investment property is at the core of your property investment strategy. Failing to do so will leave you with less profit than you expected or, worse, a property that’s just collecting dust. Take a look and review your first property and what you’ve done with it. Take stock of what you did, what worked, and the mistakes you’ve made. Apply what you’ve learned when choosing your second property and avoid the mistakes you’ve made. Your choice will depend on a number of factors including your budget, target location, target market, and goals (e.g. short- or long-term leasing, selling after renovations).
Once you’ve decided on what kind of property you’ll get (e.g. apartment vs. three-bedroom house), take note of the characteristics that make it a good choice for investment. Having a convenient location, being in an attractive and safe area, and not needing major repairs are some of the things that make a property more attractive, easier to market, and command a higher selling or rental price.
Recognise Your Responsibilities
Whether you want to choose tenants yourself or use the services of a real estate agent, consistency and the quality of tenants are crucial. Before buying your second investment property for rental purposes, it makes sense to get a rental estimate letter from the current real estate agent or property manager. This helps lenders view your loan application more favourably as you’re basically showing them that you’ll be earning enough income to service your mortgages.
It’s also important to familiarise yourself with landlord and tenant rights in your local area. Here’s where you might consider getting a property manager. Remember that having a second property practically doubles your management duties, and if you want to make multi-property investment a long-term career, you’ll need help. Aside from making sure you meet the legal requirements for your properties and fulfil your responsibilities to your tenants, a property manager can do other important tasks such as advertising and processing and updating financial statements.
Here at Clever Finance Solutions, we have the expertise and experience to help you with property investment. We understand the challenges involved with buying a property, whether it’s your first, second, or your fifth, and provide fuss-free solutions that help eliminate stress from the loan application process, manage your investments better, and guide you in making the right financial decisions. If you’re ready to climb another rung on the property ladder or if you want to put order in your financial strategies and goals, please don’t hesitate to contact us today. We’ll be more than happy to help you out.