Buying Your Second Investment Property

Your first investment was probably funded with savings or equity from your home. By the second, lenders are looking at a bigger picture: two or three loans, rental income from more than one property, and more ways things could go wrong.

In our experience, investors often hit a borrowing capacity wall at property two or three rather than a deposit wall. Equity may have grown nicely, but each new loan adds to the repayments a lender has to test.

Equity is the difference between what your property is worth and what you owe. Lenders usually let you borrow up to 80% of a property's value without LMI, so your usable equity is roughly 80% of the value minus the current loan.

The usual approach is to set up a separate loan split against your existing property for the deposit and costs, then take a second loan secured against the new property for the rest. Keeping the two clearly separate makes the purpose of each loan easier to track, which also helps your accountant.

Lenders assess all your debts at a rate several percentage points above the actual rate, and usually only count around 70% to 80% of your rental income to allow for vacancies and costs. They also count credit card limits, car loans and HECS-HELP.

Different lenders treat rental income, negative gearing benefits and existing debts differently. That is one reason working with a broker with a wide lender panel can matter more at this stage than it did for your first property.

Many investors use the second property to diversify, perhaps a different city, state or property type. Andrew has owned property in both NSW and QLD, and spreading across markets can reduce the risk of one local downturn hitting everything at once. It also means different land tax rules, so get advice.

Before you buy, make sure you have a cash buffer to cover vacancies, repairs and rate rises across your whole portfolio, not just the new property.

Doing things in the right order saves time and reduces the risk of a deal falling over. We usually start with a review of your current loans and an updated valuation, then check borrowing capacity across several lenders before you sign anything. Once you know your limit, you can set up the equity release and get pre-approval for the new purchase.

It is also worth reviewing your existing loans at this point. If your current rate is uncompetitive or your structure is messy, it can make sense to refinance and restructure before buying, so the new loan fits neatly into a cleaner portfolio. Your accountant should be part of this conversation, particularly around ownership and how each loan is used.