If you’ve amortized your mortgage or even paid it off and already bought a second property, you might be hankering to do it again. This potential third property would be known as your second investment property (assuming your main home is not an investment).
You know what to expect if you’ve been through the process of buying a secondary home in the past. There are certain aspects that are unique to purchasing a home you don’t intend to live in primarily, such as determining why you want to buy it, and how you’ll pay for its upkeep. The same applies to your third, though there are more considerations to account for.
If you’re clued up on the property market, purchasing your second investment property could open the door to further real estate growth opportunities for a more diversified investment portfolio, or to even start a small-scale real estate business if you have a knack for it. So, before you take the jump, read on to learn what you need to know before buying your second investment property.
Why buy a third property?
The difference between your first and second investment property is the difference between you and 90% of other property investors in Australia. While a moderate number of Australian households put some of their income into a second property in the form of a holiday home, small investment or renovation project, very few ever reach the point where a second investment (or third) property becomes feasible.
Making this step, if your finances can support it, is a great way to head towards financial security. But it’s not as simple as repeating the process of buying your second home. You have to think carefully about why you’re making this financial decision and what it will entail, which is what we’ll cover next.
What to consider when purchasing a third property
Buying a third property is not a decision to be taken lightly. Even if you’re confident you can comfortably put the money aside to pay for the deposit, you’ll need to be certain about whether this is the right kind of investment for you. Here are four important factors to consider thoroughly before buying a second investment property.
1. Investment potential
If you buy the right property, and take proper care of it, it can turn out to be a good long-term investment. You can do it up and sell it later, rent it out to long-term tenants, or use it as a short-term rental accommodation on platforms like Airbnb. Choose the best location by conducting ample research before you look at specific properties, and consider what demographics you’ll be targeting.
If your property is in an unpopular or underdeveloped area, you might find it vacant for months. You then have to pay off the mortgage from your own pocket. Likewise, if you choose an area that only receives tourists in the warmer months, then you’ll end up with an empty property for half the year.
2. Realistic affordability
You will need to decide whether your budget will support buying a third house if you already own one or even two with a mortgage. You would have to be able to afford these mortgages plus repayment interest rates, as well as insurance, utilities and maintenance. You’ll also be balancing the ongoing costs of two properties, alongside the home you primarily live in.
That’s why choosing a prime location is essential for your second investment property, so you can guarantee demand for tenants, holidaymakers or eventual buyers, whether you choose a tourist-heavy spot or an inner-city suburb.
3. Options for scaling up
If you’re positively geared (putting money back in your pocket as a result of earnings from your investment properties), you can then take the surplus cash flow to reinvest and fund your next investment property.
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You cannot save if you’re paying more for ongoing costs of property ownership and maintenance than what you receive back as profit. Think about whether you’re aiming to use this second investment property as a launching pad to begin a small real estate enterprise, or you’re happy just to break even.
4. Property management
Plan for the protection of your investment. Decide who is going to take care of the property's maintenance. Is the investment property close to where you live, or in proximity to your other one?
If you have the ability and time, you can manage the upkeep and maintenance of the house yourself, provided you don’t have other work commitments and can split your efforts between the two properties alongside general upkeep of your own. You can hire a professional cleaner or other maintenance service, though of course this will increase your overall property management costs.
Other costs to consider before buying another investment property
As with your main home and first investment property, you will still have to pay for other upfront charges, even if you don't have to pay a deposit. Unexpected and unplanned expenses are an undeniable reality, especially if your second investment property is left vacant more often, which is why you must be realistic about the extra costs associated with committing to this kind of purchase.
Stamp duty
This will be the largest upfront cost for most investors. The government charges it as a one-off payment and the figure varies according to the state or territory in which the property sits. Stamp duty is more expensive for investors than for occupiers. However, there are also government grants and tax deductions available to property investors which can help offset some of these steep upfront payments.
Legal & associated costs
Legal costs will go towards your lawyer or conveyancer for their work in checking property contracts and other legal documents to make sure that they are of a satisfactory standard. They also make sure that the settlement process is smooth and that you are fulfilling all your legal obligations before leasing out the property or making any structural changes in the process of renovation. Other costs will include travel to and from the property, pre-purchase pest inspections and advertising for tenants.
Second Investment Property: The Right Decision For You?
Owning a third property can be extremely expensive and tiring, but also rewarding and profitable. You must be prepared to put in the work, foot some hefty upfront costs, and devise a strategy to ensure your third property does not end up costing you more money simply to own it.
Work with an accountant and a financial planner in order to understand your cash flow and projections for a potential second investment property. Looking at your present finances is equally as important as devising a forward-thinking plan before making this kind of commitment, so take your time and speak with a professional to decide whether it’s right for you.
