Remember how you felt when you got the keys to your first home? Perhaps you were moving straight in, or maybe it was an investment property, either way I am sure that there was one thing for certain, it was an exciting and memorable time!
The second time around is no different.
The process of purchasing your second property will involve many of the same steps that applied to your last purchase, which we will briefly cover, however, there are some key differences you need to know.
This is not your first rodeo, so take a deep breath and relax, you’ve got this! Besides, we will be here to help you every step of the way.
REASONS YOU MIGHT CONSIDER BUYING YOUR NEXT HOME
There are several reasons that might make you consider buying a second home. Some of these may include:
- You have decided you want to sell the current home you are living in. Once this process is finalised, you would like to look for something new.
- You have found somewhere new you want to buy already, but have not had time to sell your current home first, but intend to.
- You want to purchase a new home to live in, but keep your current home as a rental investment.
- You want to stay living where you are, but you are looking to purchase a second property as an investment to rent out as a strategy for wealth creation.
EXPLORING DIFFERENT SCENARIOS
Sell your current home before looking for the next home
Of all the scenarios, this is probably the most clean and simple. You put your current home on the market and wait until it has sold before searching for a new property.
This option reduces the stress of managing two mortgages at the same time and eliminates pressure on you to accept a less than favourable offer than expected for your home.
Once everything has been finalised, you then have the time to look around, do your research and make the right decision.
Another bonus to having your existing home sold first, is the added benefit of knowing exactly how much you can put towards your next purchase.
When you are ready to buy again, go and see your lender to get the ball rolling.
The main thing that needs to be considered in this scenario is where you will live in the meantime. You might need to organise a rental, or perhaps you could stay with family.
You have found your dream property but haven’t sold your current home yet
You may or may not have been actively looking to move, but suddenly you have found your dream house and you do not want to miss out on it! What do you do?
Maybe where you are currently living is outgrowing your family, maybe you are dreaming of something sparkly and new, or maybe the seaside is calling you.
If this situation arises, it might help to speak to your lender about the possibility of a bridging loan.
A bridging loan is a short-term loan (generally 12 months max) that covers you between the time of buying a new property and settling on the current one. However, this means you will need to maintain two mortgage repayments until the property is sold. If the property doesn't sell quickly, it runs the risk of becoming over exposed and can be difficult to sell and you may need to consider settling for a lesser figure to avoid exceeding the expiry of the bridging loan. So make sure you educate yourself and understand the fine print before choosing this option.
You want to purchase a new home but keep your current home to rent out
When some people are looking to purchase a new home, they might decide to hold on to their existing home to use as a rental property. If your current home is in a growth area that is attractive to renters, then it can be great to keep this home in your collection as you grow your portfolio.
A benefit of holding on to your current home is the possibility of using the equity available to leverage your deposit for the second property.
Equity is the amount of money you have made in the purchase of your property. This is calculated on what your property is currently worth, minus what you owe on it.
If you purchased your current home some time ago, it is likely you have made quite a bit of equity in your home. You can use this equity rather than a cash payment as your deposit.
Some people find it difficult to let the house that means so much to them and carries so many memories be used as an investment property. There may be a much stronger emotional attachment in not letting it go, rather than a financial one. When it comes to investments, it needs to be the head at work and not the heart.
There could also be tax implications involved with using what was previously your primary home as an investment, so be sure to check these with your accountant.
You want to continue living in your principal home but add an investment property
If you are looking to grow your portfolio by adding an investment property, it is a good idea to begin by speaking with a financial advisor or accountant. They can look at your budget and see if it is a viable and worthwhile option for you.
Do your research and choose the location and the type of dwelling to find your target market.
Contact your lender to seek pre-approval. You may be able to use the equity in your current home as a deposit.
KNOW THE COSTS INVOLVED
As with purchasing you first property, many of the same costs apply the second time around.
Below is a list of what is required for the new/second property only.
If you are holding onto your current property, you will also need to factor in the costs involved with that property and add it to your budget.
Initial costs (Property number 2)
- A deposit of 20% is a good place to start, or alternatively if you are holding on to your existing home, the deposit can come from equity in that property if available.
- Stamp Duty is one of the biggest upfront costs involved. (Next to the deposit). The amount will be calculated on the market value. The amount payable will vary from state to state.
- Legal fees (It is important to enlist a legal representative early on)
- Building and pest inspection costs
- House Insurance
- Loan fees (Including valuations)
Ongoing Costs (Property number 2)
- Mortgage repayments (at least the shortfall)
- Maintenance
- Rates/Strata
- Real Estate fees to Property Manager (unless self-managed)
- Possible funds for renovation
- Insurance (Home & possibly Landlord)
Landlord insurance generally covers loss of rental income, damage to the property by a tenant and contains liability protection in case a tenant gets hurt due to a maintenance issue on your property. It is a good idea to consider this if you will be using your existing or second home as an investment.
UNDERSTAND YOUR FINANCIAL POSITION
If your strategy is to hold on to both homes long term, you need to take a closer look at your financial position. It is recommended if you are looking to increase your housing portfolio that you consult an accountant and or financial planner for assistance.
A financial professional will not only look at where things are financially, but also perform a full risk profile to see if having two properties is right for you.
Create a new budget looking at your current expenses and what is left over. Work out if what you are left with will be enough to service everything that comes with the second home purchase. Do not forget, this means that you will now potentially have double the expenses.
Learn from your accountant about the tax implications and benefits that apply to your individual circumstance, again this is where an accountant or financial professional’s advice and assistance can be invaluable.
BUILD AN INVESTMENT STRATEGY
Whether it is your existing property that is becoming your investment, or your new purchase, it is essential to have a plan.
What is your strategy?
Current home becomes investment
If you are hoping to hold on to your existing property, does it have what is required to make it a good rental?
Is it in a sort after location? Does it have all the amenities a renter is looking for (like schools, public transport and shops etc.).
Has it made good growth thus far and projected to continue to do so in years to come?
What is the rental income projection?
Second home to become investment
If you are looking to purchase a property with investment in mind, you have the added benefit of choosing exactly what it takes to be a good investment home.
Most importantly, location is key! You want an area that has shown past growth, or is an upcoming area with great growth potential. Many newer suburbs have lots of the latest infrastructure which drives people’s interest in the area.
What size property are you after? A 4-bedroom house or a 1-bedroom unit? Do you want something new or a renovation project?
Both the type of property and location will steer you toward the type of tenant you are after. (e. g. family or young professional.)
DO YOUR RESEARCH
With your investment strategy ready, it is time to do your research.
Research the market on real estate websites to look for ideas on what value you can get for your current home or what you can buy (and then rent out) your second home for.
Contact real estate agents in the area who can give you a projection of how much rent you can receive and have them show you some suitable properties if you are looking to buy.
Go online and research council websites of interest for more information if you are thinking of purchasing there.
Make sure you take some time to look up Tenant Law, and also ask yourself if you have what it takes to be a Landlord.
CONTACT YOUR LENDER
Armed with all your financial information, and feeling confident with your plan and research, it is time to speak to your lender.
If you have decided to use a cash deposit, you will look to save 20% of the purchase price, however, if you will be using equity from your existing home then speak to the bank about using this as an alternative.
To assist with affordability of two homes, have the real estate do a rental income projection for you. This can be included in your loan assessment and be the difference in showing your lender the loan is affordable.
Discuss with your lender the plan for your investment loan. Things like whether you would like to pay principal (the amount you are borrowing) and interest, or just interest only on your loan.
Decide if you would like a variable or a fixed rate loan.
Remember when choosing a lender, it is important to look beyond the interest rate. Look at the product features and pay attention to possible ongoing fees and charges.
Always get pre-approval organised before you make any final decisions (or make any promises) on a property.
THE QUICK 5 TIPS OF BUYING
You have been here before, but since it has been awhile, here is a small refresher about buying a home once you have everything above sorted (Finances, plan and pre-approval).
This is the case for both when you have sold and are buying again, or if you are holding onto two homes.
- Make an offer to the Real Estate to commence negotiations
- If your offer is accepted, arrange a Pest and Building Inspection to be done.
- Have your lender organise a valuation on the new property. If you are using equity in your current property there will be a valuation done on it also.
- Exchange contracts. There is usually a cooling off period, but once this is up and both sides have signed the contract, the deposit will be paid.
- Prepare for settlement. It usually takes roughly 4 -12 weeks depending on what you negotiate before you get the keys. Use this time to organise insurance, utility connections and possibly a tenant.
WE ARE HERE TO HELP
At Australian Mutual Bank, we are ready to help you!
Take a look at our attractive Investment home loan rates and generous features and speak to one of our knowledgeable and friendly team of Credit Specialists.
For all your insurance needs, we can get you protected.
If you are looking for a Financial Planner, we can organise that for you. Did you know all our members receive their first visit with a Financial Planner free of charge?
Call us on 13 61 91 or email us at info@australianmutual.bank to discuss with one of our friendly Credit Specialists today.
