How To Buy Your Second Investment Property


If you’ve purchased one property, you may
be wondering how should you buy your second investment property. What sort of properties
should you be looking at in what sort of area and what’s going to help you get to property
number 3, number 4, number 5 and onwards towards financial freedom of whatever it is you’re
seeking for yourself. Today, I have with me Ben Everingham from
Pumped on Property, my buyer’s agent of choice. And we’re going to talk about this issue of
things that you should look for in your second property. Ryan: Hey, Ben. How’s it going? Ben: Hey Ryan. Thanks for having me here. Ryan: No worries. First, let’s say how many
properties do you own now? Ben: Quite a few. Let’s just sort of say it
that way. We’re definitely starting to get towards 10 now, which is great. Ryan: Okay. So, you definitely past your second
property and so you’ve been through this experience before. What we wanted to do is kind of chat
back and forth about what are some of the things people should consider when they’re
looking at buying their second property to set them up for a win in the future. Because
I’m guessing most people won’t want to stop at 2 because 2 is unlikely to get you towards
financial freedom, so you’re probably going to need 3, 4, 5 or something like that. And
so, right off the bat, what do you think are some things people should consider? They already
own a property and they’re now looking to purchase their second one. Ben: I think something that you actually mentioned
in your intro, which was looking at property 2 in terms of how it’s going to help you get
property 3, 4, 5. As we’re both aware, less than 15% of the population in Australia ever
moves past property 2. And I think so many people get stuck there. So, the first thing
that I would be doing before rushing out and buying property 2 would be getting a strategy
of how I’m going to get to property 3, 4 or 5. As you said, 2 properties is going to be
amazing and you’re going to be in a great position by the time you retire. But if you’ve
got the intention like we did to get out of work in our 20’s, then it’s going to be extremely,
extremely difficult to do that. The first thing is definitely get that strategy in place
and understand how this property is going to affect the next and the next property after
that. Ryan: Yeah, and we’ll talk more about that
in this interview, but it’s easy to say to someone, “Oh yeah, get a strategy in place.”
But I think most people have no idea how to even start and how to even think about a strategy
or think about how property 2 is going to affect property 3. So let’s go through that
sort of stuff. How should I be thinking if I’m going to purchase property 2? What are
some things that could affect the purchase of property 3 down the track? Ben: The major hurdles that most people come
across at the moment, due to the recent changes in APRA, is servicing property 3. We talked
about this briefly before today’s call, but in a nutshell, they’re trying to stop investors
entering the marketplace or they’re putting the brakes on investors entering the marketplace
because prices in Melbourne and Sydney have obviously boomed in the last couple of years.
So some of the things that they’re doing is making people either earn more income to service
more debt or they’re devaluing the rental yield on the property that instead of looking
at your rate, from an interest perspective, at 4 or .5%, which is what they’re charging
you, they’re looking at it like it’s a 7% interest rate. So, those sorts of things are
what’s stopping people moving forward. In terms of the right type of property, it’s
really a property that’s going to enable you to jump into property 3. And what does that
look like? Over a 2-year period, it’s probably a neutrally geared property. So, something
on current interest rates on an interest-only loan. Say, you spend $350,000, you want it
to rent for $350 per week. You also want that property to be in a growth market. So somewhere
like Brisbane or New Castle or the Central Coast in New South Wales. And you also want
the ability to add a secondary dwelling to that property, so something like a granny
flat in the backyard that can take your rental yield from 5% through to 7.5%-8%. And that’s
going to, again, look better on paper from the bank’s perspective for you. Ryan: I think something that people really
need to be aware of is with these new rules that came in with APRA, a lot of the banks
– I’m not sure if it’s all of them, I’m not a mortgage broker – but are saying that, “Okay,
interest rates at the moment, 4.5-5% or whatever they are, but we’re actually going to assess
your ability to service a loan based on a higher interest rate of 7%. And they’ve also
put caps on how much yield they’re going to look at from a property. So, you could buy
a super positive cash flow property with a 15% yield that’s just out of this world, but
the banks are only going to look at if that property was generating a maximum of 7% yield. I think what you’re trying to get across or
what I’m hearing is that if someone’s going to purchase a property and they want it to
be a leapfrog to get them to number 3, they need to be careful of these two factors in
terms of the rate and the yield of the property. So, you don’t want to, I guess, over-extend
yourself of property number 2 because they will be saying, in terms of serviceability,
looking at a 7% interest rate. If you buy a property that’s too expensive or at the
very limit, well then, you’re just shooting yourself in the foot for property number 3,
but then, also, if your yield is too low, that’s going to affect serviceability and
if it’s too high, it’s not going to count for anything. So it sounds like you’re saying
to go for the middle ground, find something that’s got a decent rental yield, but it’s
kind of neutral and then looking at pushing it towards that 7% yield. Ben: Absolutely. That’s a perfect way to wrap
it up. I think putting my shoes back on when I was purchasing my second property, and this
is what I’d find from speaking to a lot of investors each month is that, for some reason,
when we’re buying property 2 or it might be investment property 1 after we’ve bought our
own home, a lot of people look in their local marketplace. But if your local marketplace
is Sydney where the average house is $1 million or Melbourne where the average house is $600,000
but the rental yield in those areas is only 2.5-3%. You’re potentially picking up a property
that feels comfortable and safe, but is going to put you so far back from achieving your
long-term goals. It’s far easier to buy a property at a reasonable
price that has the potential for future growth than to spend all of your money and put all
of your eggs into one basket in a market that may already have done it’s dash for the immediate
future and then, that’s also a type of property that’s really going to stop you moving forward
long term. Ryan: While we’re on this about people buying
multiple properties in the same area. What do you think about – I’ve read articles about
people diversifying their properties in different areas? Let’s say Sydney has peaked, we don’t
know that it has, but let’s say that it has and it’s going to be stagnant for the next
2, 3, 4 years or something like that. If you bought a property in Brisbane and say that
grew a bit, then I guess it helps you because at least one property is growing. Do you think
people should take that into account when they’re looking at property number 2 and diversifying
from the area they bought their first property in? Or do you really, it’s about researching
and looking at the growth factors of an area and if you’re in a good spot, buy again in
that area? Ben: 100% the second option. There’s no rule
of thumb to go let’s diversify here and there. Because even in a market like Sydney, for
example, you could be in Sydney West and then the Eastern side of Sydney and while both
of them have gone up in the last few years, they work completely differently in normal
cycles. So, I would suggest that, as you said, you go back and you do your fundamental research.
If you could have bought 2 properties in Sydney 3 years ago, it would have been far better
than buying a property in Brisbane and a property in Sydney 3 years ago. So, if you think an
area has got some potential for growth based on that high quality that you’re doing, then
go for it. Put some more eggs in the one basket. I don’t really like having too much value
in one suburb. So, I’d suggest don’t buy 3 properties in the one suburb because it’s
comfortable and it feels safe. Maybe look at something on the North side of Sydney and
something on the South side or same in Melbourne, same in Brisbane, same in Perth. Ryan: I think when it comes down to doing
your research; don’t just look for one suburb that has the right indicators for growth.
You want to find multiple suburbs with those indicators and then try and find properties
in areas that have all the right growth indicators, but not necessarily all the exact same area. I guess we’ve talked about we don’t want to
price ourselves out of the market in terms of serviceability when we’re buying number
3. We don’t want to go with something with super low yield because, again, that’s going
to screw us in terms of serviceability. What do you think, in terms of purchasing a cash
flow property for number 2, in terms of generating some passive income already? Or do you think
most people at this stage shouldn’t really worry about getting passive income out of
their portfolio, but should more just worry about growing their portfolio? Ben: You and I have had some pretty good conversations
about this off-camera and I really believe that a foundation of a great property portfolio
should be built on capital growth with an option to manufacture growth on top of that
with cash flow on top of that. It’s really easy for me to say that after buying the sorts
of properties that I have and learning those mistakes the hard way, but if I was starting
out again, I wouldn’t be sacrificing cash flow for capital growth or vice versa. I’d
be looking for a property where I can get both options because capital growth is what’s
going to make you really wealthy. Let’s say a property you buy for $400,000,
it increases in value by 10% in the first 2 years, that’s a $40,000 increasing in value.
There’s no property in Australia that’s going to put $40,000 per year in 2 years in your
pocket that’s also going to give you the cash flow on top of that. So, what I would be suggesting
is that people should be chasing that capital growth because that $40,000 is the next deposit
for property 3. I’d also be chasing properties that aren’t perfect that you can put a dollar
into the renovation and get $2 out. And then on top of that, as we discussed, find something
where you can add that granny flat in the background. That’s probably the sort of triple
threat almost of the property industry. Ryan: I think this is a good thing to touch
on because for most people, they’re like, “Am I going after capital growth or am I going
after passive income?” And they only look at high growth, really negatively-geared properties
with 2% yields that are just going to cost them an arm and a leg every month to own.
Or they look at super rural, really high cash flow properties that may not growth in the
next 10 years. And they just compare these two and go, “What am I going to do?” Whereas, really, it’s not either-or. It can
be both-and. You can get capital growth and you can get cash flow, but it’s going to take
a lot more effort. It’s going to take more research. The cash flow might not be as extreme
in some of these other areas, but you can still get good cash flow. You can generate
a neutral or a positive cash flow from a property, but if you’ve done your research and you’ve
invested in the right area, you’re going to get some capital growth as well. I think what you’re saying, in terms of if
you want to buy number 2 as a stepping stone to number 3, then capital growth is going
to be a major factor because you’re going to need that equity to draw from in order
to go and invest in number 3. Unless you’re a super awesome saver and you can go ahead
and save another deposit, which let’s face it, it’s hard enough for most of us to save
one deposit, rarely people will save two deposits. It’s just very difficult to do that. You definitely,
I think, and I’m like the positive cash flow guy, but I definitely say, in this situation,
you do want to look for a strong growth area and something that is going to grow. However,
I’m not a massive fan of highly negative-gearing properties because I’ve seen life situations
turn on their head for people. People get divorced or lose jobs or go through all of
these different situations. And if you’re heavily negatively-geared, you can get all
the capital growth in the world, but if you can’t afford the property and you’ve got to
sell it because you can’t afford to own it, then you’re not going to get any of that capital
growth. I definitely think it’s a balancing act in terms of what you’re looking for. Ben: 100% agree with you. It’s interesting,
the more that we learn, most investors end up in the same situation where it’s capital
growth, manufactured growth and cash flow. Everybody is at a different life stage. Recently,
Ryan referred me to a mutual client of ours now and he came to us and his goal was replacing
$100,000 of income within a 7-year period. He was an aggressive businessman with a lot
of available equity and so; we’ve just bought his 4th property, which was a set of 4 units
in a regional area in New South Wales. I personally, based on my stage of the cycle, wouldn’t have
bought that property for me. But his goal was to achieve $10,000-$15,000 per year passive
income for these properties, so he won’t mind me saying that we paid $485,000 for these
4 pack of units which rents for $40,000 per year. So, for him, that’s a 10% return and
that’s exactly what he needed at that time. And then, there’s other people that are looking
for that inner-city-11-kilometers-from-Brisbane-type option where you can renovate it up and then
put the granny flat out the back and still achieve your 7% rent return. Plus, you’re
getting the flip side of the 4-5% per year capital growth, long term, out of the property,
too. There’s all different types for different folks as well. Ryan: Yeah. Let’s move on and talk about manufacturing
growth. Because I think this is something that’s overlooked by way too many investors.
So many investors assess the property market and they buy in an area or they choose a strategy
based on I’m going to buy and hold this property. It’ll go up in value over time. Rent will
go up over time. And that’s all well and good to think about, but I kind of wish more people
would take an active approach to their property portfolio, treat it more like a business and
say, “How can I add value to the world?” And the same thing that we do in business or that
we do in our jobs is that we add more value then it cost us and that’s how we make a profit.
I wish that people would start to look at properties and look at property number 2 and
say, “Okay, where is a property where I can actually add value to the world and I can
actually add value to this property more than it’s going to cost me with some creative input?”
Which may be a renovation or it may be a granny flat or it may be re-zoning or it may be a
face-lift. What do you think for property number 2 and
people in terms of manufacturing growth? Is there a particular strategy that’s going to
work for more people than other strategies? Ben: Definitely. My first rule of thumb is
definitely don’t bite off more than you can chew. People buy their first property and
then want to do a subdivision for property 2. That’s all well and good if you’ve got
$200,000 in equity or savings, but if you don’t, a safer strategy, so that you don’t
come undone, before you even begin running is to look for the ugly duckling in the best
street and something that you can cosmetically renovate. We’ve talked about this before,
cosmetic renovation might be repainting, it might be re-dressing the windows, it might
be changing the light fittings, it might be rendering the house. It’s all that really
basic stuff – polishing floor boards, replacing carpets. That simple stuff. To me, that’s
the first step. If you look at a 5-year strategy of just buying
that second property, in the first 12 months, you probably just chuck a tenant straight
in and leave it as is. After your 12 months, you go and do that basic cosmetic renovation.
And then, you re-value the property because the market’s increased if you bought well.
If you bought under market value, obviously, you’ve got some value there, plus the renovation.
So you should be able to get a 10% gain in that first year from those couple of things.
And then, maybe at the end of year 3, I like to buy 3-bedroom, 1-bathroom houses that I
can convert into a 4-bedroom, 2-bathroom house. That’s a bit more of an aggressive strategy,
but it enables you, again, for every dollar you put in to get at least $2 of value back
out of the property. You’ve done the cosmetic renovation in the first 12 months; you’ve
pulled out a deposit to move on to your next property. In 3 years, you go add those bedrooms
or bathrooms, that’s again another deposit to move on to another property. And maybe
at the end of year 5, when you care about cash flow more, you actually go and add that
granny flat and that granny flat enables you to increase the yield. There’s so many ways of doing it, but manufacturing
that laid strategy, that’s the perfect option for a second homebuyer. Ryan: Yeah. I think people should consider
this as well when they’re looking at buying a property is what can I do throughout the
years to constantly improve this? So, maybe, like you said, you purchase it and you may
not have the money upfront to do a cosmetic renovation so you leave it for 12 months.
You get enough money to do a renovation. When you do it, you go to your mortgage broker,
potentially get it re-financed, pull some money out of it so you can go in and invest
again. You might then want to leave it for a couple of years. And then, always be looking
at your properties and saying, “Well, what more can I do? What more can I do to improve
this property and to get more out of this property?” Like you said, in year 3, you can go ahead
and do some conversions or things like that. I guess the message that I want to get across
to people is that constantly be looking at the properties you do have and say, “Well,
what can I do to get more out of this property to make it more valuable so that I can go
ahead and move forward to property number 3 or 4 or whatever it may be.” You were saying cosmetic renovations. You
don’t always have to do a conversion. I was just looking to rent. We looked at literally
2 places next door to each other, 2 townhouses. One was renovated, that was really nice, that
was on the market for $410 and the one next door, exact same layout, basically exactly
the same house, was un-renovated and was renting for $365. Ben: Wow. Ryan: I didn’t go to the $410 place, but we
ended up moving there, but my wife saw it. But I went to the $365 place and I was like,
“Yeah, I wouldn’t live here.” just because it wasn’t renovated. So, if it does that for
rent, it can also do that for the value of your property. Don’t underestimate the value
a good cosmetic renovation can do to the value of your property. Ben: Absolutely. Yup, 100% agree. Ryan: I think, in summarizing, we would say
you need to be careful with serviceability, right? Ben: Absolutely. Ryan: So we don’t want to buy something that’s
too expensive that’s going to lock us out of the market because we’ll never be able
to service anything again. We want to be careful not to go for something that’s too low-yield
because, again, that’s going to ruin our serviceability. Ben: Correct. Ryan: We were talking about super high cash
flow isn’t going to help you in terms of serviceability. It may hurt you in terms of getting the capital
growth you need. So that might not be the best strategy, but obviously, everyone needs
to assess their own situation. We’re saying that, really, we’re looking for those middle
ground properties that are decent cash flow, but neutral or slightly positive or slightly
negative, but they’re in good growth areas. But then, also, properties that we can improve
upon and manufacture some growth out of it. Did I miss anything? Ben: No. I think we’ve spoken about a lot,
but you wrapped it up really well. Ryan: Yeah. I hope that helps people who have
purchased a property and they’re looking to move on to their second property. In the next
episode, we’re going to talk about un-stuck when growing your property portfolio. So if
you feel like you’re currently stuck whether it’s at one property or you’re stuck at 2
or 3 or 0. If you’re stuck, we’re going to talk about some strategies and ideas to help
get you un-stuck. Maybe mentally, maybe financially, all of that sort of stuff. You guys can check out Ben, he is a buyer’s
agent and a very good one at that. Ben, do you want to give them a little bit of information
into what you do for your clients? Ben: We work with Ryan’s community. Every
month, we offer a strategy session for 10 of his listeners, which we think is quite
cool. That’s really about, as Ryan said, how to identify where you are, where you want
to go and bridge that gap in terms of identifying where that next step is. I think that was
the challenge for me at property 2 and that’s a challenge for a lot of people at property
0 to property 5. You know, what’s next and how can I achieve my goals fastest? So if
you feel like dropping in for one of those sessions, we can definitely help out. They’re
completely complimentary and free for Ryan’s audience. As a business, we help a number
of investors every month from all over Australia purchase high quality properties that are
exactly the same as the ones that I’ve been able to replace my income with. I’m obsessed
with them. Love this stuff just like Ryan does. Ryan: Yeah. I think in a previous episode,
we were talking about how many open homes you went to and it was like something over
100 or 300 a month or something like that. So Ben looks at a lot of properties, finds
a lot of properties for his clients. So, if that’s something that you guys are looking
for help with, if you want help finding a property in one of those areas that we talked
about – something with a potential that I can manufacture in the future. Maybe you don’t
have the time or the skills to do it yourself, then hiring and paying for a buyer’s agent
might be a worthwhile investment for you. As Ben said, he is offering On Property listeners
a free complimentary strategy session. If you want to check that out, just go to onproperty.com.au/session
and you can go ahead and book in a time over there with Ben. Look, I just thank Ben for
all that he does for the community for the free knowledge that he shares and we really
appreciate it. So, until next time, guys, stay positive.

Paul Whisler

8 Comments

  1. Investing in property can be an effective means of power charging your wealth. There are arguments for investments with either positive or negative cash flow. Having financial planning software which will integrate all your loans over an extended period of time will allow you manage your debts more efficiently.

    You could save yourself thousands of dollars in interest we a good debt management plan.

    One of the big time bombs, can occur when property investors don’t think about capital gains tax when selling the property. If you have owned the property for 20 to 30 years, capital gains tax can be a substantial amount of money. This tax reduces how much you can re-invest from the profits. Having financial planning software which will calculate your future capital gains tax will allow you to manage your cash flows more efficiently.

    The great thing about real estate is that if you never sell your property, you never pay capital gains tax. You just need to make sure that when you buy the property, it is something you can hold and pass on to your children as an inheritance. That means, having an adequate rental income to support you in your retirement.

    Do a YouTube search on Financial Planning Software and see what is available. Make sure it has good modelling tools and can give you easy to read reports on you investments.

    Managing your property investments and cash flows efficiently may save you thousands of dollars.

  2. Love watching your videos very educational and help beginners investors

  3. Need help from one of these damn youtube gurus
    Just left a local prime lender, I cant get a heloc or a 1st mortg on my investment prop. B/c my credit is below 645 and I dont work or collect w2s. I don’t even have any bills in my name
    This Realestate shit is bologna how can the lil guy ever get ahead if can never leverage.
    Starting the think this game is really fuckin rigged
    Anyone gone thru this bs
    Prop. Is free from any liens or encumbrances

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