I’m hesitant about writing an article with a heading like this. Yes, I understand the concept that an article’s title should grab your attention – but surely this sounds a little too good to be true right? It’s not.
I work with clients often who have their own home and don’t have any concept of the fact that their second property – whether it be an investment property, a shack or a block to build on could be well within their reach – even if they don’t have a whole surplus of cash lying around to use as a deposit.
The two most common sources of hidden power when it comes to buying your second property are:
1. The equity you already have in your own owner occupied home
2. Utilizing your super fund.
Let’s start with the equity you already have. If you’re like most people you’ve been paying down your mortgage religiously. Maybe you’ve been doing that for quite a while or have been paying extra with each payment, perhaps you’ve been offsetting your savings against it – regardless, the equity you have in that home could be the vehicle you need to get you into property #2 without any cash. A broker can easily do an assessment for you based on the equity you have built up (probably securing a valuation for you at no cost) and looking at the income you have along with future rent (if applicable) and let you know whether #2 is within your reach now – and if not, how to get there.
But I don’t have a deposit? You may not need one! A mortgage broker can explain to you how to either: release some equity in your property to use as deposit, use a deposit bond or another strategy to get you around this.
But I have no idea about property investing? So you’ll learn! If it’s something that interests you you’ll chat with your accountant, your broker will recommend books you can read and introduce you to real estate agents and you’ll get into heavy research mode. Finding out if you’re able to buy a second property and even getting pre-approved doesn’t mean you have to. It just gives you options.
Things to remember:
- Deal with a broker who knows about investment properties (structure, tax effective loan structures and has great contacts they can introduce you to) – preferably one who owns investment properties themselves
- Confirm everything with your accountant and get their advice out of the gate about the best ownership structure, cross collateralization and whether you should have an interest only loan. Don’t have an accountant? (I’d recommend one if you have an investment property – ask your broker for a good recommendation)
- Be prepared to pay a higher rate of interest on your investment property than your owner occupied home loan at the moment
Now option 2 – utilising your super fund can be a lot more complicated. There are some great benefits including reduced capital gains on property sales where the property is held in your SMSF (self managed super fund) – to the tune of 15% down to 0% in some cases.
BUT – as I said, it’s more complicated.
– You want to have at least $200,000 – $250,000 in your super before you consider this strategy.
– You need an accountant who can talk to you about this and is knowledgeable as the legislation is constantly changing – many accounting firms have SMSF specialists within the firm so it might mean dealing with someone else in the company.
– You need to be prepared that there are going to be thousands of dollars worth of costs to fund (out of your super) to set up the required entities
– You’ll need to contribute 20-30% of the value of the property you’re purchasing plus all costs.
– And you can’t buy something in super that you want to use yourself (so having a shack you stay in but also rent out for example is a big no no).
This is not a strategy for everyone, but for those who utilize it well it can be very effective.
Step 1. Talk to your accountant.
Step 2. Not every broker does SMSF lending – again, speak to someone who knows their stuff and preferably has done SMSF borrowing to purchase property themselves as well as numerous loans for clients.
Kirsty Dunphey is a mortgage broker and avid property investor both inside and outside of SMSF. Kirsty is a credit representative (CR No. 465864) of BLSSA Pty Ltd (Australian Credit License No. 391237)