Top tips to acquire two investment properties

Buying two investment properties at once or in close succession

Buying two investment properties at once, or in close succession, is possible when your total debt-to-income ratio stays below six times your gross income and you have access to enough deposit and equity.

The debt-to-income lending limit came into effect in February this year and applies separately to investor lending at each bank. Each lender can approve up to 20 per cent of new investor loans to borrowers with a DTI of six or above, but most keep that allocation for borrowers with exceptional circumstances. For most borrowers in Croydon looking to acquire two properties, staying under the six-times threshold gives you access to the full range of investment loan products without needing an exception.

Consider a buyer who earns $120,000 a year and wants to acquire two properties. With a DTI limit of six, total borrowing across all loans, including any owner-occupied mortgage, should not exceed $720,000. If they already have a $400,000 home loan, they have $320,000 of borrowing capacity left to work with. That might fund one property, or it might fund two smaller properties depending on rental income, deposit size and how the loans are structured.

Rental income is assessed at between 70 per cent and 80 per cent of market rent by most lenders, depending on the property type and their serviceability policy. A Croydon unit renting at $450 per week would be assessed at around $315 to $360 per week, which helps offset the repayment calculation but does not eliminate the impact of the loan on your DTI. Interest rates are assessed at the loan product rate plus a 3.0 percentage point serviceability buffer, so even if the actual rate is lower, the calculation assumes a higher rate to confirm you can manage repayments if rates rise.

Using equity from your home to fund two deposits

Equity in your existing home or first investment property can be used to fund the deposit and settlement costs for one or both of the next properties.

Most lenders allow you to borrow up to 80 per cent of the value of the property being used as security without needing to pay Lenders Mortgage Insurance. If your Croydon home is valued at $800,000 and you owe $400,000, you have $240,000 in usable equity before hitting the 80 per cent loan-to-value threshold. That equity can be accessed by refinancing your existing home loan or by setting up a separate equity release facility, which keeps the new borrowing quarantined from your original loan.

When you are acquiring two properties at the same time, the order in which you settle and the way you structure the security can affect how much you can borrow. Some buyers prefer to settle the first property, allow that property to revalue, and then use the combined equity from their home and the first investment to fund the second deposit. Others prefer to settle both properties simultaneously using equity from the home and a single valuation across all securities. Both approaches work, but they require different loan structures and different timing.

In our experience, buyers who want to settle two properties within a few months of each other benefit from working with a broker who can map out the full sequence before the first application is submitted. A lender that supports cross-collateralisation might allow you to use your home and the first investment property as joint security for the second loan, while a lender that prefers standalone securities will assess each property independently. Neither approach is right or wrong, but the structure you choose affects your future flexibility if you want to sell one property or refinance later.

Structuring loans for two properties at different loan-to-value ratios

The loan-to-value ratio on each property affects the interest rate, the capital requirement for the lender, and whether you pay Lenders Mortgage Insurance.

If you have enough equity and deposit to keep both properties at or below 80 per cent LVR, you avoid paying LMI and you access lower risk-weighted capital treatment under the prudential standards that apply to Australian lenders. That generally translates to lower rates and more flexibility. If one property sits at 85 per cent LVR and the other at 75 per cent, you will pay LMI on the higher-LVR loan and the rate on that loan may also be higher, depending on the lender's pricing.

Some buyers choose to split their equity unevenly to keep one property at a lower LVR and accept a higher LVR on the other. That can make sense if the lower-LVR property is the one you expect to refinance or sell first, as it gives you more flexibility without needing to repay as much debt to bring the LVR down.

Interest-only repayments are available on most investment loans and can help manage cash flow when you are servicing two new loans at once. The interest-only period is typically five years, and lenders assess your ability to service the loan on a principal-and-interest basis even if you choose interest-only repayments initially. Long-term interest-only loans with an LVR above 80 per cent and no fixed end date for the interest-only period are classified as non-standard loans under the prudential framework, which means they attract higher capital requirements and are less commonly offered.

Tax treatment for properties acquired after May last year

Properties acquired after 7:30pm on 12 May last year are subject to new tax rules that apply from the 2027-28 income year, unless the property is an eligible new build.

Under the new rules, rental losses on established investment properties acquired after that date can only be offset against income from other residential properties, including capital gains on residential properties. Losses can be carried forward but cannot be offset against salary, business income or other non-property income. Properties owned before that date, including properties under contract at that time, are grandfathered and continue to allow full offset of losses against all income. Eligible new builds, including dwellings constructed on previously vacant land and developments that increase the number of dwellings, are exempt from the new rule and continue to allow full negative gearing.

For Croydon investors acquiring two properties now, both properties will be subject to the new negative gearing treatment unless one or both are new builds. That does not prevent you from acquiring the properties, but it does change the cash flow and tax position if the properties are negatively geared. If one property is positively geared and the other is negatively geared, the loss from one can offset the income from the other. If both are negatively geared, the combined loss is carried forward and can only be used against residential property income in future years.

Capital gains tax treatment also changes from 1 July next year. Gains that accrue from that date will be taxed under a new system that allows cost base indexation using CPI and applies a 30 per cent minimum tax rate on real gains. For properties owned before that date and sold after, gains are split between the old rules and the new rules. New builds retain access to the existing 50 per cent CGT discount as well as the new indexation option, and you can choose the method that gives the lower tax outcome at the time of sale.

Timing your second purchase after the first property settles

Buying the second property a few months after the first allows the first property to be revalued and any capital growth or equity to be recognised by the lender.

Some Croydon buyers prefer this approach because it spreads the settlement and borrowing process across two separate applications, which can reduce the upfront cost and complexity. It also gives you time to confirm the rental income on the first property, which some lenders will recognise after a lease is signed and the property has been tenanted for a period, typically three to six months depending on the lender.

The risk with delaying the second purchase is that interest rates, lending policy or your personal circumstances might change between the first and second application. Lenders reassess your income, expenses and existing debt each time you apply, and a change in DTI policy, serviceability buffer or your employment situation can reduce your borrowing capacity even if nothing else has changed.

If you are confident you want to acquire two properties and your income and equity support both purchases now, submitting both applications at the same time or in close succession locks in your borrowing capacity under current settings. If you prefer to stage the purchases, make sure your broker models both scenarios and confirms the second property is still achievable under a range of rate and policy assumptions before you commit to the first.

Managing cash flow and holding costs across two properties

Holding two investment properties requires enough cash flow to cover periods when one or both properties are vacant, as well as the ongoing costs that are not covered by rent.

Vacancy rates in Croydon and surrounding suburbs vary depending on the property type, condition and how well the property is managed. Units in older blocks or properties that require maintenance before re-leasing can sit vacant for longer than well-presented houses or newer apartments. Most lenders assume a vacancy rate of around 4 to 5 per cent when assessing serviceability, but actual vacancies can be longer depending on the market.

Ongoing holding costs include council rates, water rates, owners corporation fees if the property is in a body corporate, insurance, property management fees, repairs and maintenance. Interest on the investment loan is also deductible to the extent the property is rented or genuinely available for rent. Costs incurred while the property is being renovated or is otherwise not available for rent are generally not deductible until the property is available again.

Some buyers set up an offset account linked to each loan or to their main home loan and keep a buffer of three to six months of holding costs in that account. The offset reduces the interest payable and gives you access to cash if a property is vacant or requires urgent repairs. Other buyers prefer to keep the properties on interest-only repayments for the first few years to maximise cash flow and reinvest the difference into the next deposit or into renovations that increase the rental return.

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