Ready for a second property? Using your home’s equity to invest

You've settled into your own home, the finances are steady, you may even have a little saved up, and you're wondering, what next?

How about stepping into the world of property investment?

With home-buying and home-owning experience under your belt, you could be perfectly poised to take that leap, while netting yourself some additional income and expanding your asset portfolio.

But how to know if you're really ready?

Experts say this comes down to your financial ability, whether you've done the research, and if you're comfortable with an element of risk – because no property investment offers guaranteed returns.

"There's never going to be a perfect time. The right time is when you've got the financial capacity and confidence to go into the market," said The Property Mentors property investment expert Luke Harris.

Melbourne-based Mortgage Choice broker David Thurmond says to be financially ready to purchase an investment property, owner-occupiers ideally need sufficient borrowing capacity plus equity in their home to draw on.

Mr Thurmond always reminds his clients that property investment in Australia is a long game.

"Due to stamp duty, flipping properties isn't as viable here as it is in, say, the United States – where you can buy a house, do it up and sell a few months later.

"Here, you need 10 to 15 years of growth in your property to make it worthwhile."

How many Australians own investment properties  – and do they make money?

Property investment may seem like a national pastime in Australia, but it may not be as common as you think.

Of Australia's 26.64 million population (2023), 2.27 million were property investors in the 2021-2022 financial year – up from 1.6 million in 1999-2000, according to the Australian Taxation Office.

Among them, 1.6 million owned one investment property, about 428,000 had two, around 132,000 had three, around 47,000 had four, and so the numbers declined as the properties increased.

Among these individuals, 42% incurred a net loss, while 58% were neutral or made a net profit – though those with a loss may have benefited from tax advantages or property value appreciation.

Of the 1,000 mortgage holders surveyed for The Mortgage Choice Home Loan Report released in November, 46% negatively gear an investment property.

Mr Thurmond says hunger for property investment is closely tied to the interest rate cycle.

"Between 2017 and 2022, low rates, higher borrowing capacity and increasing equity due to rising prices encouraged owner-occupiers to invest."

Though higher rates have tightened borrowing capacity since then, investment activity is now rebounding.

Mortgage Choice broker David Thurmond explains the interest in property investment is closely linked to the interest rate cycle. Picture: Supplied

Australian Bureau of Statistics data shows the value of new housing loans to investors in September was 29.5% higher than a year ago.

Meanwhile, the Home Loan Report highlights a nearly 29% national rise in investment loan values in the September quarter, following a 21% increase in June.

Choosing the right investment

The right location for your property investment is key.

Experts warn the biggest mistake made by rookie investors is choosing a place just because they know it.

"This strategy relies heavily on luck," said Adviseable property investment advisor Kate Hill.

A strong investment location features solid infrastructure, economic health and sustainable demand due to natural population growth, she says.

"This doesn't mean mining towns with temporary booms. We're talking about your boring, everyday suburbs where new hospitals, schools or roads are being built. The area around Western Sydney International Airport is perfect. It will create long-term employment opportunities and has established infrastructure and economic diversity."

Mr Thurmond advises finding properties with both strong rental returns and capital growth prospects.

"Think about the person who will live there. A one-bedroom unit typically suits single city workers, so proximity to workplaces, transportation, hospitals or universities is essential."

Historically, houses have outperformed apartments due to unit oversupply, but investment advisers say this trend is changing.

"Apartments are increasingly viable investments as they offer cheaper rent when housing affordability is stretched, are usually located in urban areas with amenities, and cater to the growing number of single-person households," Ms Hill said.

While houses are generally thought to perform better as an investment than apartments in the long run, apartments are increasingly viable investments. Picture: Getty

Mr Harris adds that apartments may provide better tax benefits since owners also hold a share in the building and communal facilities.

"This allows for depreciation claims on the building and assets like appliances and furniture, potentially resulting in a larger tax return and more money in your pocket."

Lastly, avoid properties requiring high maintenance, such as older homes or those on large blocks of land, he adds.

"New properties are more of a set-and-forget investment. For the first 10 years at least, you shouldn't need to change the hot water system, the taps or the balcony railing."

Get your team of experts

Property investment is complicated – and can be more time consuming than you expect. This is why you need a team of experts behind you.

Experts agree that having a team around you in your property investment journey is key to simplifying the process. Picture: Getty

A mortgage broker can check your numbers, an investment adviser can help you work out a strategy that's not led by emotions, and an accountant can assess the potential tax benefits.

Once you've bought your investment, a property manager is also a good idea, Ms Hill says.

"Property investments are like children — you never know which ones will give you grief.

"A property manager can take care of small maintenance issues and keep you up to date on changing tenancy regulations. This minimises headaches, saves you time and allows you to invest in another state with confidence," she said.

"The cost of a property manager is minimal, tax-deductible and invaluable."

Be bold – but take your time

Despite the risks of property investment, sometimes you just have to take a leap of faith, Ms Hill adds.

"You shouldn't scare yourself into inaction. Property investment is a fantastic way to get ahead.

"It's reassuring to know you have growing assets, providing almost guaranteed passive income later in life. This can help you retire or reduce work sooner, and pay off your mortgage quicker."

But take your time to find the right property, adds Mr Harris.

"Property isn't going anywhere. There's no need to rush into the market out of fear of missing out," he said.

"Understand your market and ensure the property aligns with your plan. The goal is to hold onto an investment property for as long as possible, so it's only a good investment if you can afford to keep it."

I always find these stats so fascinating - if you think this section interrupts flow though, you could always move it to the end.