So, what’s equity and how can it help you buy a second property?
The equity in your home is the value of your home minus the debt you owe. So, if your home is worth $400,000 and you owe $250,000, your equity is $150,000. If you are eligible for a second loan, you may be able to use up to 80% of this equity as a deposit towards your second property. This means that you don’t actually have to save for another deposit.
But before you take the plunge, there are a few things you should consider.
Know why you want a second property
Before you make an offer on a second home, be sure you know why you want a second property.
If you are purchasing as an investment, consider all the hidden costs, and long term costs associated with owning a second house, such as maintenance. Research rental returns, and perhaps consider renting out your existing home, and moving into your new home.
If you are purchasing a holiday house, you need to be sure you have the capital to support the purchase. Talk to your tax accountant about options for renting out the property as a holiday rental, when you aren’t using it.
Having a clear understanding of your goals will help direct decisions such as where to buy, how much to spend, and the type of property you are looking for.
Research and plan
A smart investor has a plan. A good plan involves research. Consider rental returns. These will fluctuate, so if you’ve been a homeowner for some time, talk to your local real estate agent about the demand for rental properties, and rental prices in your area.
It’s also worth looking at the rise and fall in property prices. There’s been a drop in the last year, in some areas, such as Sydney and Melbourne. This could be the time to take advantage of lower prices. The historically low interest rates may also entice you to consider making a purchase sometime soon.
If you are planning to do up a property to sell, consider the fluctuating market, as well as costs associated with renovating, and buying and selling. While it may initially seem like a no-brainer to add $100,000 in value to a second property, if it costs you $80,000 to renovate, and another $20,000 in buying and selling fees, the investment may not be worth your while financially.
Talk to your tax accountant about how purchasing and renting out a second property will affect your tax.
Can you afford a second property?
When you purchase your first property, you need a deposit. When you purchase a second property, you may be able to leverage your equity, which means you don’t need to save another deposit.
It’s important to that linking both securities to the same loan would mean both properties are at risk, if you default on the mortgage. You can discuss the ins and outs with your Smartline Adviser.
Don’t forget to calculate purchasing costs, like stamp duty, and conveyancing. You should also ensure you have a comfortable buffer zone, in case you hit a tricky patch. You need to be able to afford both mortgages, if your second property is unrented for any length of time, or if you run into unexpected maintenance costs.
The good news is I can help guide you through the process of purchasing your second property. Book a chat with me about your options today.