If you are thinking of buying a second home and renting out your first as an investment property, it pays to weigh up the potential capital gains, rental income, loan repayments and more to see if it’s a good move.
The main goal of having an investment property is to grow your wealth and generate a passive income. Here are some possible financial benefits of buying a second house and renting out your first home:
Your investment property can generate monthly rental income. A monthly rental income that is greater than the costs of maintaining the property – including any mortgage repayment costs – is referred to as ‘positively geared,’ which means you profit from it. If your strategy is to buy a positively geared property that will yield rental returns, it's a good idea to establish whether the rent you collect each month covers your costs.
If it looks as though rent on the property might not cover costs, it’s important to consider whether or not it will gain equity as it improves in value over time so you may realise a return when you sell. If the property is unlikely to do either of these things, it may not be a sound investment.
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If you plan to sell your first home further down the track, it’s a good idea to research the capital growth trends for similar properties in the area. As your existing property continues to appreciate over time, you are likely to make capital gains when you sell it.
Your main residential property is generally exempt from capital gains tax. You may continue treating your first home as your main residence for capital gains purposes when you stop living in it and rent it out for up to six years. You must consult your tax adviser to determine the capital gains tax implications from the sale of your property.
Just note that previous sales aren’t a guarantee prices will remain on the same trajectory.
To find out more about property trends in the suburb you are interested in, and estimated property values, check out our property market research tool.
There are certain tax deductions that you could claim against your rental property. For example, you may be eligible to claim the interest you pay on your mortgage repayments as a tax deduction, as well as costs associated with maintaining the property.
You may love your house, but will others? Discuss with a local property manager how to maximise your home's rental appeal. Here are some questions to ask:
Check out our guide what makes a good investment property for more information.
When you’re thinking of buying a second house and renting your first property, you’ll need to allow for additional costs that may arise. Your rental income may cover these, but it’s wise to have a positive cash flow or a cash buffer.
These costs can include:
If you rent out your first home and buy a second property, you may need a new home loan. If you have enough equity in your first home, you could use this as additional security on the loan for the new property.
The amount that you can borrow will depend on:
Equity is the difference between the balance on your home loan and the market value of your property. You may have built up equity if you’ve paid some or all of your loan on your first home and it’s appreciated in value since you bought it.
You could use this equity instead of a cash deposit when buying a second property. The more useable equity you have in your first home, the more you may be able to borrow for a second home (provided your bank can see you’ll be able to service the extra debt). Check out our guides to unlocking equity in your home and how to use your equity to buy an investment property, and estimate your useable equity with our home equity calculator.
Another aspect to consider is how you’ll structure your total loan over the two properties.
Interest rates on home loans for investment property are typically higher than if you were going to live in the property yourself. For this reason, it pays to discuss how you structure your home loan with your lender if you are keeping one home as an investment property, and how best to use the equity you have in your current home to help fund your second home. If you want to, get a Westpac lender to call you back for a chat about this.
Learn what you need to begin investing in property: from interest rates, to planning your investment and applying online.
This guide will help you dig a bit deeper into what to consider when renting out your first home and buying a second house.
The equity you have in your home can open the door to additional funds. Find out how you can unlock this for a home renovation, to buy a second property, or other things.
Credit criteria, fees and charges apply. Terms and conditions available on request. Based on Westpac credit criteria, residential lending is not available for Non-Australian Resident borrowers.
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice. Credit provided by Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.