If you’re about to buy a second property but keep hold of your existing one to rent out, you’re not alone. It’s actually the most common way that people get into property investing.
Often, people find that their property is making more money every year than they are. That’s no reflection on the effort they’re making at work. Instead, it’s a sign of just how much potential there is in property investment as a wealth-building strategy.
Property investing can deliver on multiple fronts. Rental income can give you a steady cashflow, properties that increase in value can grow your equity, and you can use the increasing property value and rents to borrow more money and build a portfolio over time. Often you can do all of this, without ever putting your hand in your pocket for more than that first deposit.
But buying a second property can also be complex. Challenges like refinancing, tapping into your equity, and managing two mortgages can put off even the most enthusiastic first-time investor.
Don’t worry, because we’ve put together your comprehensive guide for navigating and mastering those challenges.
Why buy a second property and rent out the first?
If you have the ability to purchase a second property and keep your first one as an investment property, there are a lot of reasons why you might want to do this instead of selling the first property.
Firstly, you’ll need to consider if you can effectively achieve the same outcome i.e. getting the cash you need out of the first property to enable the purchase of the second property, without selling the first property so you can keep the upside as the property appreciates in value. How do the net dollars in your pocket after all of the transaction costs like agents fees and any tax compare if you were to sell the property, or simply pull the equity out of the property through a cash out refinance, or a simpler solution like Futurerent?
Often people discover the first property they bought has grown in value, allowing them to pull the equity they need out using a solution like Futurerent or refinance their existing loan with a new loan for a larger amount - known as a ‘cash out refinance’ and using this money toward the deposit on the purchase of your second property.
If you rent out the first property, you’ll need to estimate the potential income and how will this look after you account for both cash and ‘non-cash expenses’ like depreciation and what will this mean for your cash flow before and after tax based on how much you plan to borrow against the property. Often property investors carry a small cash flow deficit during the year, and receive a tax refund at the end of the year making the investment more attractive on an after tax basis.
Typically, investors in Australia are not holding investment properties for the cash flow or rental income - they are investing for long term capital growth. These investors generally look at the cost of holding the property after any income tax benefit they receive and compare that to their expected capital gains each year and how much cash equity they have tied up in the property.
Buying a second property and renting out the first, can make more sense financially than selling up and going all in on one property for a few reasons - firstly interest on an investment property is tax deductible and you’ll earn rental income to help carry that debt load and secondly it comes with the benefit of diversification and providing you with multiple ways to make money or exit strategies where you can always sell one of your properties in the future if you need to but continue to benefit from the natural hedge against inflation that owning real estate provides and enjoy capital growth on a larger asset base.
Then there are all the practical reasons why it might be a good idea to hang onto the property - usually properties you bought originally to live in make for good investments as the same reason that attracted you to the property will attract other homeowners in the future and you are investing in an area you clearly know well. In fact most investors start out as homeowners and become accidental investors when they come to the practical realisation that if they don’t hang onto their first home, they will never actually get around to actually buying another property.
If done right, owning a second property gives you more ‘chips in the game’ and improves your chances of continuing to enjoy capital growth that you can at some point in time ‘cash in’, whether it’s to fund your retirement or pay off your primary residence. After all, the problem with capital gains on the home you live in is that if you are selling and buying in the same market, unless you are prepared to change markets, any gains are probably going to be offset by a higher price you have to pay.
Do you need a deposit for your second property?
In short: yes, you need a deposit to purchase your second property — but it doesn’t always have to be a cash deposit.
When you bought your first home, you would have made an initial contribution to the property purchase price (unless you used a guarantor’s loan). This was probably around 10-20% of the property price. So far, all this still applies to your second property.
But you don’t need a cash deposit to buy your second property, whether you’re buying an investment property or upgrading your home.
If you've already got one property under your belt, it's likely you have some equity in that property. You can put that equity towards part or all of your deposit. How? By refinancing your existing home loan for equity release.
That might seem like buying a property with no deposit, but it’s more like transferring your equity from your existing property to cover the deposit for your new property.
But refinancing isn’t for everyone - not just because refinancing can often be incredibly painful, but because it often involves changing your long term debt strategy (think 25-30 years) for what might otherwise be a shorter term cash flow requirement that might be able to be solved in a fraction of the time and at a fraction of the real dollar cost If you plan to keep your first property as an investment property
Futurerent is another option. With Futurerent, you can access up to two years’ rent from your first property in advance, which might either by itself or together with a cash-out refinance give you the deposit you need for your next purchase.
How much equity do you need to buy a second property?
If you’re going down the equity release route, it’s important to know that you probably can’t access all of your equity to buy a second property. Lenders will typically want to see you keep a loan-to-value ratio (LVR) of 80% or lower in your existing home.
In practice, if you’re considering equity loans, you’ll generally need an LVR of 70% or lower before you can access any meaningful equity for your next purchase. Without it, the bank may want you to pay LMI.
Here’s an example of how equity works when buying property:
- If your current home is worth $500,000 and your loan amount is $150,000, if you are only looking at dealing with the banks and exploring cash-out refinancing your usable equity would be $250,000 i.e. you may be able to access another $250,000 bringing the new loan balance to $400,000 (80% of the property value) If you are looking at cash-out refinancing options, you can generally calculate your usable equity by taking 80% of the property value and then deducting your current loan balance from this amount.
- In this same scenario, if you are looking to access more money to boost your deposit or surplus funds for any reason with Futurerent you could access a further $50,000 on top of the $250,000 cash out refinance. Generally Futurerent will allow you to access up to half of the equity you have in your property.
- Collectively this would provide a $300,000, which would generally be capable of powering a $1 million purchase plus stamp duty and cash buffer, provided you have the borrowing capacity.
Remember that it’s the current market value, not your original purchase price, or the amount you’d like to get in an ideal world that determines how much equity you can pull out of your property. You might also want to speak with a mortgage broker for professional advice.
Financing options for a second property
As we’ve touched on, when it comes to your financing options, there are multiple routes you can follow:
1) Refinancing for equity release
This is where you refinance your home with a new mortgage of more than the outstanding balance on your current mortgage. That gives you spare cash that you can put towards a deposit on your new property.
2) Using Futurerent for upfront rental income
With this option, you can cash out up to $100K on each investment property you own without selling or dealing with the banks. Futurerent unlocks up to half of the equity you have in your property with no credit impact or complicated paperwork.
How does this work? Futurerent provides up to $100K of your rental income now - that's seamlessly returned from just a portion of your tenant's rent. So you can access your money sooner and still earn ongoing rental income.
3) Low-deposit home loans
Some lenders offer low-deposit home loan options where you may be able to borrow up to 95% of the property value. This may allow you to buy your second property sooner. However, these low-deposit home loans often come with higher interest rates, increasing your monthly repayments. Plus, you’ll need to pay LMI if you borrow more than 80% which can be very expensive.
You should also be aware of the absolute total dollar cost of borrowing over the total term of the loan - even if the interest rate seems low if you are paying the loan off over 25-30 years the interest is going to add up Whatever option you choose, it’s often worth seeking professional advice before you go ahead.
Costs of buying a second property
Most people don’t think much beyond the most obvious cost of a second property: the additional mortgage.
But that’s not the only cost you need to consider. There are upfront costs like stamp duty and legal fees, and all of the unknown unknowns, which is why it’s helpful to hold a cash cushion of 6-12 months to cover any unforeseen circumstances.
Managing two mortgages
If you rent out one of your two properties, your rental income makes covering all those expenses more achievable. How much so depends on what you put down as a deposit, the size of your monthly payments, and how much your property can bring in from rent.
While you might not know the exact amount your existing home could be rented for, putting yourself in a prospective tenants shoes and simply looking at other available rentals in the area should give you a fairly good idea on what you might be able to get by renting out your property. For the property you’re looking to buy, it’s a good idea to get a rental estimate from not only the agent selling the property but an independent agent who is not involved in the transaction.
How you manage your cashflow varies depending on how much you’ve borrowed. Reviewing your repayments alongside your potential rental income and expenses helps you gauge whether you might be positively geared, when your rent is greater than your mortgage payments, or negatively geared, when the mortgage is greater than the rent.
Both can still be positive investments in the long term. Most people are happy with being cash flow neutral either before or even after tax. More serious investors compare holding costs to expected capital growth, because a property that runs at a loss but increases in value over and above the shortfall can still be a smart investment.
If you find you’ll be positively geared, there’s a higher chance that you’ll be able to comfortably afford both mortgages. If you’ll be negatively geared, you may need to assess whether you can afford the out-of-pocket costs. If it starts looking difficult, you might consider an interest-only loan.
To help minimise your interest it’s worth thinking about your monthly cash flow and how you can utilise an offset account which is a feature of some home loans most borrowers don’t do enough with, where the balance of your account is subtracted from the mortgage balance when calculating interest. For example, if the balance of your mortgage is $300,000 and you have $50,000 in your account, you would only pay interest on $250,000 instead of the full balance. By setting up automated transfers that handle any cash surplus you might have at the start of each month, you can minimise the interest component of your monthly payment and pay off your home loans faster.
Practical considerations before buying a second property
Before you buy, it’s important to make sure you have a financial buffer in place. Even if you’re refinancing, what you can access might not always be enough to fund both your deposit and your upfront costs, so you may need to use savings as well. But you should still try to maintain a strong buffer in your savings account to cover any unexpected costs of the purchase.
Consulting a mortgage broker or a financial advisor is always a good way to get some independent advice and support from somebody who knows the options. There are also various tax deductions and benefits that you might be eligible for as an investor.
Benefits of uising Futurerent for second property purchases
The trouble with a cash-out refinance deal is that it can often force you to solve one problem by creating another. The loan you have from your bank is the single biggest component of your debt and, by trying to fiddle around the edges and makes changes to fund the purchase of a second property, you can end up doing yourself more harm than good.
How? Because any small change in your interest rate makes a big difference in dollar terms, especially if you exit a favourable rate midterm to access more cash but take on exit fees and a higher interest rate instead. With a low LTV ratio and features like offset accounts, you can reduce get a lower interest rate. By looking for the bank who is willing to lend you the most, you will often be taking on a higher interest rate on the entire loan.
That’s a difficult enough pill to swallow when it’s for one property, but with multiple properties it could send your whole property investment strategy into disarray.
Instead, look for the best long-term debt strategy and then handle the deposit on your second property separately. How? By accessing an advance on your rent with Futurerent.
Futurerent gives you access to up to $100,000 in future rental income from your rental property. Often, that can mean you have access to more money than you could get via the banks. It’s also a lot simpler, with less paperwork and fewer checks on your personal finances.
It also might allow you to move to property number two more quickly, meaning you benefit from more capital growth. That was 6.7% nationally in 2024, so on a $1m purchase that’s already a $67k difference in one year, and even higher in some areas.
Buying a second property and renting out the first requires a lot of thought. You have to consider your existing finance arrangements, the impact of releasing equity, the administrative requirements, and the long-term financial implications. Futurerent can make the process financially and administratively simpler.
Ready to start building your property portfolio? Discover how Futurerent can help you fund your second property faster and smarter.
FAQs
- Can I buy a second property with no deposit?
Yes, by using equity in your first property through refinancing or accessing rental income in advance via Futurerent.
- How do I estimate the rental income for my first property?
Research local rental listings or request a rental income appraisal from a real estate agent.
- What happens if my rental income doesn’t cover the second mortgage?
You’ll be negatively geared and need to cover the shortfall, but potential capital growth and tax deductions may offset this. Options include interest-only loans or using an offset account.
