Buying a Second Home

While buying a first home in Australia has become a cumbersome process for first home buyers, there are property investors that are satisfied yet. They want more, as in more properties and more houses. Rest assured, this is possible. However, your decision of buying a new home whilst retaining your previous one needs a lot of analysis from various perspectives. Here are some perspectives that you need to take into account before investing in your second property in Australia:

1. Communicate with the Australian Tax Authorities – Take into account your current capital gains and rental income being generated from your property (if your property is on rent) and discuss these with your accountant to communicate with the Taxation authorities. It is important to discuss these issues beforehand.

2. Using equity to buy – A wise decision to buy a new home should be based upon the equity in your first home. For example, if your home is worth $500,000 and you have paid $300,000 to the bank, with $200,000 still owing, you have a $300,000 equity share in the house. As a general rule of thumb, it isn’t feasible to get a loan approved above the $300,000 value of your home as banks and financial institutions only take into account the equity worth of the property, not the market worth.

3. Rental income from second property – The rental income you earn from investment in second property can be used to offset the loans of your first property. However, you need to discuss these issues with the taxation authorities as described earlier. It is a good idea to get an estimation of the monthly rental income of your second property, from a real estate agent.

The lender would require this letter to be showed by the borrower. It has to to be kept in mind that the lender would not account the entire rent as 100% complete income because differences could always occur. For example, if the letter shows $2,000 monthly rent, banks would not consider more than $1200 as the rental income. To make sure that rental income does not become more of an issue, you need to get the next property at a well-maintained and exotic location. A good way to look for such type of property is to get a list of locations where tenants demand such properties.

4. Management of your cash flows – Investing in another property requires management of cash flows as it is going to have a big impact upon how you manage your monthly payments. You should be having substantial monthly income to fund both properties. The key to being a successful borrower lies in handling the first property and managing the other property from the cash flows of 1st property, alongside managing the costs of living.

5. Safety leverage – To get a bank loan, an important prerequisite is collateral and if you are going to show your first property as a collateral for the second one, you are at high risk of losing both in case you get defaulted. As a result, it is of pivotal importance to have a backup plan of your investments to minimize your chances of losses. It is good to save for at least 6 months of your monthly income that you can show as collateral for the second property.