How to Keeping First Home as Investment Property in 2023

Are you considering purchasing a second property but unsure of what to do with your first home? Many people overlook the benefits of keeping their first home as an investment property.

By doing so, you can generate rental income, capitalize on potential capital gains, and enjoy tax benefits.

In this article, we will guide you through the process of transforming your first home into a thriving investment property, ensuring a smooth transition into the world of keeping your first home as an investment property.

Short Summary

  • Keeping the first home as an investment property provides rental income, capital gains potential, and tax benefits.
  • Assess the financial situation to ensure affordability and understand legal requirements for renting out a property.
  • Consider risks such as market fluctuations, tenant issues & increased debt before embarking on the journey of investing in property.

Reasons to Keep Your First Home as an Investment Property

Imagine a scenario where you can generate monthly rental income, enjoy capital gains potential, and reap tax benefits – all while owning a second property. Sounds enticing, doesn’t it? By keeping your first home as an investment property, you can achieve all of these advantages and more.

In the following sections, we will delve deeper into the benefits of rental income, capital gains potential, and tax benefits, providing the essential insights needed to make a successful property investment.

 

Rental Income

Rental income is the lifeblood of any successful investment property. With tenants paying rent on a regular basis, you can cover mortgage repayments and generate passive income. How can you ensure that your rental income is consistently in the black? Monthly rental income must be greater than all costs associated with ownership, including mortgage payments.

To estimate your rental income, it’s advisable to consult with a local real estate agent. They can provide you with valuable information on the potential rent of your property based on local market trends and property features. By setting a competitive rental price, you can attract reliable tenants and maximize your rental returns, contributing to a successful property investment.

Capital Gains Potential

Capital gains potential refers to the appreciation of property value over time, which can increase your overall wealth. As a property investor, your goal should be to achieve capital growth, allowing you to gain from the increasing value of your investment property. But how can you evaluate the potential capital gains of a property?

One key factor to consider is the location of the investment property. Researching recent sales in the area and understanding the prospects of the property appreciating in value can help you estimate potential capital gains. Additionally, considering the right time to purchase a subsequent property, such as when you have accumulated a substantial amount of equity in your first home, can further enhance your capital gains potential.

Tax Benefits

Aside from rental income and capital gains, tax benefits are another advantage of keeping your first home as an investment property. As a landlord, you may be eligible to claim deductions for property expenses and depreciation. Furthermore, you might benefit from negative gearing, a tax strategy that allows you to deduct losses incurred on investment from your taxable income, potentially reducing your tax payable.

To maximize these tax benefits, it is essential to understand the specific tax laws and regulations applicable to your situation. Seeking professional tax advice can help you navigate the complex world of taxation and ensure you are well-prepared for any tax implications that may arise from your investment property.

Assessing Your Financial Situation

Before you embark on your journey to transform your first home into an investment property, it’s crucial to assess your financial situation. To ensure a successful transition, you need to evaluate factors such as affordability, the amount of equity in your existing property, and your borrowing capacity.

In the following sections, we will provide insights into these essential elements, helping you determine whether you’re ready to become a property investor

Affordability

One of the most critical factors to consider when keeping your first home as an investment property is affordability. Can you afford to manage two mortgages and other associated costs? To ensure you can cover the expenses for both properties, it’s essential to evaluate your financial capacity, taking into account your income, expenses, and potential rental income from the investment property.

By doing so, you can avoid the pitfalls of financial stress and enjoy a successful property investment journey.

Equity in Existing Property

Equity, or home equity, is another essential factor to consider when contemplating keeping your first home as an investment property. Equity is the value of the portion of your property that you own, free from any outstanding mortgage debt. It is calculated by subtracting what is still owed on the mortgage from the market value of the property. Determining the amount of equity in your existing property can help you gauge your capacity to use it as a deposit for a second property or refinance your existing home loan.

To calculate the equity in your existing property, simply subtract the outstanding loan balance from the market value of the property. Banks typically provide up to 80% of the market value of the property as a loan, leaving the remaining amount as available equity. This equity can be used as a cash deposit to finance your second property purchase, ensuring you have the necessary funds to embark on your property investment journey.

Borrowing Power

Borrowing power is a vital component of your financial situation when considering keeping your first home as an investment property. It refers to the amount you can borrow from a lender based on your income, expenses, and credit history. Knowing your borrowing power can help you make informed decisions about the type and size of investment property you can afford.

To calculate your borrowing power, you can use online tools such as a home loan calculator, which takes into account your income, expenses, and credit history. By understanding your borrowing power, you can ensure that you select a suitable investment property that aligns with your financial capacity and goals. This will ultimately contribute to a successful and sustainable property investment journey.

Preparing Your First Home for Renting

Once you’ve assessed your financial situation and determined that keeping your first home as an investment property is the right move, it’s time to prepare your home for renting. This involves addressing property maintenance and repairs, meeting legal requirements, and setting the right rental price.

In the sections below, we will guide you through each of these crucial steps, ensuring a smooth transition into becoming a landlord.

Property Maintenance and Repairs

Ensuring your property is in good condition and meets safety standards is an essential step in preparing your first home for renting. This includes addressing any necessary repairs, maintaining the landscaping, and ensuring all appliances and systems are functioning properly. By keeping your property well-maintained, you can attract reliable tenants and maximize your rental income.

As a landlord, it’s your responsibility to address any urgent repair requests from your tenant in a timely manner. This may involve arranging repairs or asking the tenant to cover any damage they have caused. To ensure you have the necessary funds for emergency repairs, regular maintenance, and renovations, it’s crucial to set aside an adequate budget for property maintenance and repairs.

Legal Requirements

Complying with local laws and regulations is an essential aspect of preparing your first home for renting. This includes understanding and adhering to various legal requirements, such as property owner liability insurance, local rental regulations, and tenant rights.

By being well-informed about the legal aspects of renting out your property, you can avoid potential legal issues and ensure a smooth and successful property investment experience.

Setting the Right Rental Price

Setting the right rental price for your investment property is a crucial step in ensuring a successful property investment. To determine an appropriate rental price, it’s important to research the local rental market and ascertain the current rate for comparable properties. Factors such as the property’s size, condition, and proximity to amenities can also influence the rental price.

One guideline for determining the rental price is the 1% rule, which suggests that the rental price should be approximately 1% of the property’s purchase price. However, it’s essential to regularly review rental prices to ensure they remain competitive and reflect current market conditions. By setting a competitive rental price, you can attract reliable tenants and maximize your rental returns, contributing to a thriving investment property.

Find out your borrow capacity

Financing Options for Buying a Second Property

Now that you’ve prepared your first home for renting and assessed your financial situation, it’s time to explore financing options for buying a second property. There are several options available, such as refinancing your existing home loan, investment loans, or bridging loans.

In the following sections, we will provide an overview of these financing options, helping you make an informed decision that aligns with your financial goals and property investment strategy.

 

Refinancing Your Existing Home Loan

Refinancing your existing home loan can be an effective way to access equity or secure better loan terms for your second property purchase. By refinancing, you can obtain a new home loan and take out additional funds using the equity in your property. This can provide you with the necessary funds to buy a second property, either covering the deposit or the entire purchase amount, depending on the amount of equity available.

Before refinancing your home loan, it’s essential to consult with a financial advisor and mortgage broker to determine if refinancing is the best option for your situation. They can help you evaluate the potential costs and benefits of refinancing, such as increased interest costs or the need to pay lenders mortgage insurance if you wish to borrow more than 80% of your property’s value.

By carefully considering your options, you can make an informed decision that best suits your financial needs and property investment goals.

Investment Loans

An investment loan is a financial instrument specifically tailored for purchasing investment properties. This type of loan can enable you to:

  • Acquire an investment property
  • Benefit from rental income
  • Capital gains potential
  • Tax advantages

By considering investment loans as a financing option, you can ensure that your loan is designed to cater to the unique needs and challenges of property investing, thereby increasing your chances of success.

Investment loans can provide you with the flexibility to structure your loan to suit your individual needs

Bridging Loans

Bridging loans provide a financial solution for bridging the gap between purchasing a second property and selling your first home. These short-term home loans can help you cover the costs associated with buying a second property, allowing you to secure the new property before selling your existing home.

By using a bridging loan, you can avoid the stress and financial pressure that may arise from managing two mortgages simultaneously, ensuring a smoother transition into property investing.

Working with Real Estate Professionals

As you embark on your property investment journey, it’s essential to work with experienced real estate professionals who can guide you every step of the way. Property managers, mortgage brokers, and tax/legal advisors can provide invaluable support and expertise, ensuring a smooth transition to becoming a successful property investor.

In the following sections, we will discuss the roles and benefits of these professionals, helping you make the most of their services and expertise.

Property Management Services

Property management services can play a crucial role in the success of your investment property. By delegating tenant-related tasks and property maintenance to a professional property manager, you can:

  • Save time, effort, and potential headaches
  • Have someone locate tenants and collect rent
  • Address maintenance and repairs
  • Ensure compliance with local regulations

This allows you to focus on other aspects of property investing.

The cost of hiring a property manager, including property management fees, typically ranges from 8% to 12% of the collected rent income. While this may seem like an added expense, the benefits of having a professional property manager often outweigh the cost. By having an expert manage your property, you can ensure that your investment property remains in good condition, attracts reliable tenants, and generates a steady stream of rental income.

Mortgage Broker Assistance

Mortgage brokers can provide invaluable assistance in finding the best loan options for your property investment. By acting as an intermediary between you and the lender, they can help you identify the most suitable loan products, negotiate favorable terms, and complete the application process. Mortgage brokers can save you time and effort, ensuring you secure a loan that meets your needs and financial goals.

When selecting a mortgage broker, it’s important to conduct thorough research and choose one with a proven track record. Here are some steps to follow.

  1. Obtain referrals from trusted sources.
  2. Read online reviews to gather insights into the broker’s reputation and experience.
  3. Inquire about their qualifications and licensing.
  4. Ask about any fees they may charge for their services.

By following these steps, you can find a reliable mortgage broker who meets your needs.

Tax and Legal Advice

Tax and legal advisors play an essential role in guiding you through the tax implications and legal requirements associated with property investing. These professionals can help you understand complex tax laws and regulations, as well as ensure compliance with legal requirements related to rental properties.

By seeking professional tax and legal advice, you can avoid potential pitfalls and legal issues, ensuring a smooth and successful property investment experience.

Potential Risks and Challenges

While keeping your first home as an investment property offers numerous benefits, it’s also important to be aware of potential risks and challenges. These may include market fluctuations, tenant issues, and increased debt and financial pressure.

In the following sections, we will discuss each of these potential risks and challenges, providing insights to help you make informed decisions and mitigate potential problems.

Market Fluctuations

Market fluctuations can have a significant impact on property values and rental demand. Factors such as economic conditions, investor sentiment, and geopolitical events can cause property values to rise and fall, making it difficult to accurately predict the future value of your investment property.

To navigate market fluctuations, it’s essential to stay informed about market trends and be prepared to adapt your property investment strategy accordingly.

Tenant Issues

Tenant issues, such as late payments or property damage, can create additional stress and expenses for property investors. To mitigate potential tenant problems, it’s crucial to:

  • Screen tenants carefully
  • Establish clear expectations from the outset
  • Maintain consistent communication
  • Address tenant concerns promptly

These steps can help prevent issues from escalating, ensuring a harmonious landlord-tenant relationship.

In addition to proactive communication, having a property manager on your side can greatly assist in managing tenant issues. Property managers are experienced in handling tenant-related matters and can often resolve problems before they escalate, saving you time and effort. By working closely with a property manager, you can minimize the risks associated with tenant issues and ensure a successful property investment experience.

Increased Debt and Financial Pressure

Managing two mortgages and additional property-related costs can result in increased debt and financial pressure. This may include:

  • Higher mortgage repayments
  • Insurance costs
  • Taxes
  • Other expenses associated with maintaining two properties

To mitigate the risks of increased debt and financial pressure, it’s crucial to carefully assess your financial situation and ensure you have the necessary funds to cover both mortgages and other associated costs.

Working with a mortgage broker can also be beneficial in managing debt and financial pressure. They can help you find the most suitable loan options and negotiate favorable terms, ensuring you can comfortably manage your home loan repayments and other financial commitments.

By carefully considering your financial situation and seeking professional advice, you can minimize the risks associated with increased debt and financial pressure, ensuring a successful property investment journey.

Summary

Keeping your first home as an investment property can be a rewarding and financially beneficial endeavor. By carefully considering the advantages, assessing your financial situation, and working with real estate professionals, you can successfully transform your first home into a thriving investment property. Remember, the key to a successful property investment lies in thorough research, careful planning, and informed decision-making. So, are you ready to embark on your property investment journey?

Frequently Asked Questions

Can the first property I buy be an investment property?

It is possible to purchase an investment property as your first property, as most people forget the fact that they don’t have to live in their first purchase.

A first home buyer investment property typically falls in a more affordable part of the market.

What is the 1% rule property investment?

The 1% rule states that for a potential investment to be viable, its monthly rent must equal or exceed 1% of the purchase price. By multiplying the purchase price plus repairs by 1%, an investor can determine the base level of monthly rent required.

The goal is to find properties that produce at least this amount of rental income.

Can I rent out my first home Australia?

Yes, you can rent out your first home in Australia. You may need to refinance your loan to an investor home loan, and the interest rate may increase as a result.

Additionally, you can still treat your property as your main residence for capital gains purposes when renting out your property, although you should consult a tax adviser about the implications of doing so.

How long do you need to live in a house to avoid capital gains tax Australia?

You need to live in a house for at least 12 months to avoid capital gains tax in Australia. Holding the property for more than 12 months allows you to reduce your capital gain by using either the discount or indexation method.

The discount method reduces the capital gain by 50% if the property has been held for more than 12 months. The indexation method takes into account inflation and reduces the capital gain by the same amount.

What is the meaning of second home?

A second home is an additional residence, like a vacation spot or relative’s house, where one frequently visits and feels welcome and at home. Examples include a beach house, country cabin, or the home of close relatives and friends.