Recently, a current landlord asked advise about purchasing another income property and whether or not it was the way to go. I have always been of the opinion that property is a good investment. Moreover, profitable and reliable property investments are rarely based on just one property, and aren’t usually achieved by buying and holding just one property. Instead, investors should aim to move up the property ladder, whether to diversify investment, increase profit or increase the size of properties to accommodate pets, children, aging parents or all of the above.
If you have already bought your first property, you’ll still vividly remember how difficult it was to get up onto that first rung, however, the hard part isn’t over. It can often be just as difficult to move up to the next rung on the property ladder as it was to get up onto the first one, which is why you need to keep these tips in mind.
Buying and Selling at the Same Time in the Same Price Bracket
Property prices are fluid across time and across different sectors of the market – where the first home market may be experiencing a boom and properties in this price bracket are in high demand (and therefore highly priced) premium properties may be getting heavily discounted. Therefore, if you are looking to move up the property ladder, you have to keep in mind that if you are buying and selling at the same time, in the same price bracket that you are going to be experiencing both the good and the bad of the market at the same time too.
For example, if you are looking to sell your property which has gone up in price 10% in the last 12 months, that is great news as a seller. However, all the other properties in your price range have likely gone up 10% in the last 12 months too, so if you are looking to buy in the same bracket, your equity will have evened out. Luckily, when you are looking at moving up the property ladder, you are also usually looking to move up in the price bracket too so those differences and movements can work in your favour if you look for them.
Value Versus Costs
The value you would get from moving up the property ladder also has to outweigh the costs of that move, either now or in the future. Therefore, start by having your current property valued so you know the exact amount you have to work with in equity, and whether you can find the next property on the ladder which will truly increase your net worth. Unfortunately you may be unpleasantly surprised by the valuation of your current property as some areas of the market are still experiencing a downturn, so you may find a better path up the ladder if you wait out the downturn in your market.
When adding a new property to your portfolio there are also a number of fees and charges to consider, such as:
Stamp duty. Can be a percentage of the purchase price or a set amount depending on your state or territory and your price range.
Mortgage fees. When you buy a new property you’ll need a new mortgage which will come with new valuation fees, application fees, administration fees, legal fees and probably even some ongoing fees.
Deposit. Whether you use your own cash or the equity in another property, your deposit is going to cost you around 10% of the purchase price of the property. Remember that the larger your deposit, the lower your loan to value ratio and if you are able to drop your LVR to 80% or less, you can usually avoid paying lender’s mortgage insurance.
Repayments. Your move to a bigger and better property to move you up the ladder will likely also mean bigger repayments so make sure that your budget allows you to maintain your new position on the ladder, and that you don’t come crashing back down.
Interest. You also need to make sure that your new loan is affordable now and into the future because while interest rates are low while the economy recovers, you need to stress test your loan too, so see whether you’ll still be able to afford your new repayments if interest rates were to go up one to two percent.
Long Term Goals
Moving up the property ladder is not something you should try and do too fast, and you should set long term milestones to achieve in your path to the top. Therefore, remember that if you are already on the first rung of the ladder, you are well on your way, so be patient and don’t worry if your valuation hasn’t come back as high as you would have liked.
In the meantime keep saving and maintaining your current loan. This means keeping current on your repayments and paying more than the minimum where you can to increase the equity in your property. A great way to save when you have a home loan is an offset account, as you’re unlikely to earn more interest in a traditional savings account than you are paying on your home loan, but the funds in an offset account directly reduce the amount of interest you pay on your home loan at the same time.
