So, you’ve already purchased your first home and you’re well on your way to paying it off. Good job! But now you might find yourself wondering how to buy a second property. Perhaps you’re upsizing, or you’re simply looking to capitalise on an upcoming investment opportunity? Either way, even if you’re not quite ready yet, it’s helpful to prepare your finances and understand how to go about buying your second property so that when the time comes, you’re ready to go!
There are several factors to consider when it comes to buying a second property, but first, you need to think about why you’re looking to buy and what your strategy is. Will this second property be a home to live in for the next 5-10 years? Or are you planning on buying a second property, renovating it, and then selling it later on down the track?
By understanding what your next steps are and how you can leverage your existing equity to help you get there, you can plan for the future. For the savvy property investor, it’s especially important to understand how they can maximise their investment so they can buy again when they’re ready.
Step 1: Organise Your Finances
When it comes to learning how to buy your second property, it’s important to get your finances in order. This includes:
- Understanding your financial position, including how much equity you might have (more on this later), how much your home is currently worth, what other debt you might have, what your assets look like, and your income, as well as your partner’s income, if you’re part of a couple
- Making a budget and making a plan to find out what your borrowing power could be. Try to maximise your borrowing power as much as you can. Then calculate your current and future expenses to see how much you’ll be able to save
- Identifying any ways you could save or even work more to maximise your income, even if it’s only in the short term
- Think about any upcoming expenses or events. If you’re having a baby, for instance, this will significantly impact your ability to save. Speak to friends and family so you have a realistic understanding of what any upcoming changes to your situation could mean
Step 2: Take Your Home Equity into Consideration
Next, take into consideration your equity! Instead of having to scrimp and save another 20% for your next property, you may be able to use the existing equity in your home. But what exactly is equity?
Equity is essentially the difference between your home’s market value and whatever is remaining on your home loan balance. So, say your home’s current market value is $900,000, and you still need to pay $350,000 on your home loan. That means your equity will be $550,000. But the longer you are paying off your loan, and the more your home’s value increases, the more equity you will have to work with.
Step 3: Decide What You Want to Buy
Now that you understand your financial position, think about what you’re buying. First, you’ll need to decide if you want to buy an investment property, or if you’re buying a home to live in.
If you’re buying an investment property, what is your strategy? Are you hoping to see long-term capital growth or shorter-term rental returns? If you’re renting out your current property, make sure you understand how much rental income you could secure, as well as any additional costs.
Next, think about the areas you want to buy in and conduct thorough research in that area. If you’re going to be living in the area (or even if you’re buying an investment property), go to the area, walk around, check out the local shops, and research the nearby amenities. Check out the local listings and take note of how fast properties are selling, so you can understand the demand in that area.
Our tip: Don’t overstretch your budget by buying a property you can’t afford, and ensure you have a buffer to cover yourself if anything changes in your financial situation. Consider a less desirable or “up-and-coming” area, instead. You’ll get far better value.
Step 4: Is Now the Right Time to Buy?
Finally, you’ll need to seriously consider if now is the right time for you to buy, or if you’ll be in a significantly better position down the line. If you’re in a good financial position now and you have strong equity, now might be a good time to buy, considering Australia’s record low interest rates.
Make sure you factor in any future interest rate increases and check that you’ll still be able to afford any mortgage repayments if rates change. Be sure to also factor in any purchasing costs such as stamp duty, conveyancing, and home repairs.
Our tip: If in doubt, why not speak to a broker or directly with a lender? They’ll be able to give you a realistic idea of what you can actually borrow and which kinds of loans are available to you.
The most profitable property investors have a thorough knowledge of when to buy and sell to their best advantage. Learn more about property investing here.
Decided to sell your property instead? Contact us today for a valuation.