So you've had your first investment property for a while and it's doing well. You're enjoying the benefits of investing in property, but you want to move up the ladder. And so you decide it's time to buy another property. But do you need to sell your existing property before buying a second one? If not, what are your options?
In this guide, we'll take you through the basics of how to buy a second property with no deposit and look at some tactics investors use to buy multiple investment properties.
Do you have to sell your first property to buy a second property?
No, you don’t need to sell your first property to buy a second property. In fact, it’s possible to buy multiple investment properties without needing to sell, given that you’re financially stable.
There are benefits to buying a second property without selling your first:
- avoid paying real estate agent commission
- avoid paying potential capital gains tax
- no need to worry about juggling the selling and buying processes at the same time
- no time pressure
Property is a game of finance. If you’re looking to buy a second property without selling, you must be able to afford the initial deposit of your new property, plus the ongoing mortgage repayments and holding costs of both your new and existing properties.
How do you buy a second property with no deposit?
You might think that you need a large deposit to buy your second property. If you’ve recently used most of your savings on your first purchase, the last thing you want to do is use your own savings for your deposit.
However, there are other options available which allow you to buy your next investment property without a deposit in cash.
Equity in your existing property can be very powerful. If you have been paying off your mortgage for a while or your property has increased in value, you may be able to use that equity as a deposit for your next property. But if your property’s value has decreased since purchase, this is not an option for you.
An equity release will generally require you to refinance your mortgage and go through a valuation. If you’re on a fixed rate, your lender will likely charge you a break cost to refinance.
Line of credit home loan
Similar to a credit card, a line of credit home loan is a form of revolving credit, except it’s based on the amount of equity you have. On a line of credit loan, you’ll have a pre-approved limit which you can draw up to, without having to go through a loan application every time you borrow money.
You only need to pay interest on what you’ve drawn, though note that interest rates on line of credit loans are generally higher than standard mortgages.
Futurerent lets you access up to 2 years’ rent in advance (capped at $100,000 per property) on your existing investment property, if you put the funds towards a deposit for your next property purchase. Instead of paying interest, you pay a fixed cost over a period of up to 3 years.
Keep in mind that even if you don't necessarily need a cash deposit to buy a second property, you'll generally still need to take out an investment loan from a lender.
How do you calculate how much equity is in your existing property?
To calculate your property’s equity:
- Find out the current value of your property.
- Find out your remaining loan amount (your debt).
- Subtract your debt from your property’s value. This is your equity.
But it’s unlikely that you’ll be able to access all of it. Generally, lenders only lend up to 80% on the value of your property minus what you owe, unless you’re willing to pay lenders’ mortgage insurance (LMI).
To calculate your property’s usable equity:
- Work out 80% of your property’s current value.
- Find out your remaining loan amount. Subtract your debt from 80% of your property’s value. This is your usable equity.
Property value x 80% - what you owe = your usable equity
Here’s a simple example to work out your usable equity:
- Let’s say your property is worth $500,000 and your loan amount is $300,000.
- 80% of $500,000 is $400,000
- After subtracting your debt ($300,000) from this, you’re left with $100,000 in usable equity.
If it’s too complicated, there are also home loan calculators available online to help you work out your equity.
How do you buy multiple investment properties?
Achieving financial freedom is unlikely with just one investment property - it’s much more accomplishable if you own multiple investment properties. But building a substantial property portfolio doesn’t happen overnight. Here are a few tactics experienced investors commonly use to grow their property portfolio.
Leverage is your best friend
Even if you have the cash for a deposit, it doesn’t always mean it’s a good idea to use it. Knowing how to leverage effectively is key to buying multiple properties faster.
In property investing, leverage means using borrowed money (say from a bank) to invest, instead of using your own funds. This allows you to secure more properties faster, though it comes with risk.
If property prices go up, you can potentially magnify your returns. Conversely, if property prices go down, you may find yourself in negative equity, where you’re paying off a loan that’s worth more than your property.
Maximise your borrowing power and serviceability
Aside from your income, lenders look closely at your expenses to assess how much you can borrow and whether you can afford the loan long-term. If you can, cut credit cards and avoid personal or car loans, as short-term loans can lower your borrowing power. Try to reduce living expenses by targeting unnecessary outgoings, such as holidays.
If you have multiple high-interest unsecured loans, you may also consider consolidating them into your mortgage, as chances are your mortgage would be on a lower interest rate.
Find the right lender
Choosing the right lender can make a world of difference to your borrowing power. For example, some lenders exclude or discount your rental income by up to 20% when assessing your overall income. In other cases, some lenders may exclude or discount your income type. This could have a greater impact on those who are self-employed or earn commission or bonuses.
By going with a lender that will factor in 100% of your income, there’s a higher chance of increasing your borrowing power.
Maximise cash flow
The higher your cash flow, the more likely and easily you’ll be able to service your home loan repayments and buy additional properties. If you’re positively geared, you’re effectively making a profit every month. This enables you to reinvest surplus cash flow into funding the costs of securing your next investment property. On the other hand, if you’re paying out of pocket on ongoing property holding costs, this will hold back how fast you can save.
Buy properties under market value
Securing real estate at a discount can help you build equity quicker than waiting for the market to rise. Searching for these hidden gems can be tricky but they are out there.
One way is to seek properties that have been on the market for a longer-than-average time. Some investors hunting for a bargain target distressed properties for sale. Another way to find properties under market value is to look at unrenovated properties which you’ll easily be able to add value to.
What are the costs you need to consider when buying your second property?
Even though you don’t necessarily need a deposit to buy your second property, there are still other upfront buying costs that you might have to pay. Here are some that you should consider when buying:
This will probably be the most significant upfront expense for most investors. It is charged once-off by the government and varies depending on which state or territory the property is located in. Stamp duty is generally higher for property investors compared to owner-occupiers.
Lenders mortgage insurance (LMI)
If you're borrowing more than 80% of the property purchase value, lenders will typically require you to pay for this form of insurance which covers them in the event that you default. While it’s generally not a small cost, some investors see it as a necessary evil to grow their property portfolio.
Paid to your solicitor or conveyancer, this covers the cost for them to review property contracts and any other legal documents for legal due diligence. They’re also responsible for making sure the settlement process goes through smoothly. You usually don’t pay your conveyancer until after settlement.
If you’re buying a freestanding house or attached dwelling, it’s recommended that you get a building and pest report. If you’re buying any property type on strata title, such as an apartment, you should get a strata report. These reports can help you detect a property’s hidden issues before you sign on the dotted line, potentially saving you a lot of money down the track.
Initial lease costs
The initial lease costs include the letting fee charged by your leasing agent plus any marketing costs to advertise the rental listing. This may not be top of mind, but you'll need to factor in forgoing the first few weeks of rent to secure an ongoing tenant. Before your first tenant moves in, you may also have a vacancy period where you won’t receive rental income.
Other things to consider before buying a house
Aside from costs, there are a few other things to factor in before you make the decision to buy a second property:
- Borrowing power – Buying an investment property isn’t just about the deposit, it’s also very much about what you can afford to borrow, which will be based on your financial situation. Use home loan calculators or speak to a mortgage broker to find out.
- Mortgage type – There are many different home loan types out there but now that you also have an existing loan to consider, you’ll want to structure your loans strategically.
- Rental returns – Cash flow is king in property investing. Look at the property’s potential annual rental income to gauge if a property is going to be positively or negatively geared and plan accordingly.
- Capital growth – A property that generates strong capital gains will help you build equity faster, enabling you to buy your next property with no deposit much sooner.
- Rental demand – If a property is attractive to tenants and easily rented out, this could help minimise the chance of holding an empty rental which isn’t generating rental income for you.
Follow your property investment strategy
Buying your second investment property is an exciting milestone as you work to build your portfolio and increase your wealth. It’s also the time to start thinking more about your property investment strategy and how you want to move forward.
Whether you want to buy and hold or target negatively geared properties, having a well-defined property investment strategy will set a clear pathway to your goals. All investment strategies have their own advantages and disadvantages so you’ll need to weigh them up to find the one that’s right for you.
It’s important to be adaptive when the situation calls for it but ultimately, following your strategy will guide you to make informed decisions on your investing journey.