Rentvesting: Investing while renting

As average house prices skyrocket to almost 13 times higher than the median household income in some parts of the country, homeownership for many young Australians appears to be a distant dream. However, a growing number of millennials are switching strategy by choosing to rent where they want to live, and buy elsewhere.

What is rentvesting?

Rentvesting is a property buying strategy used by those who cannot afford to buy in the areas they want to live in. Instead, they opt to rent in their desired location and buy an investment property in a more affordable area. The rental return for this property is used to cover mortgage repayments.

Recent research conducted by Lendi showed that 62% of millennials surveyed (18 to 34 year olds) say they cannot afford to buy property in the area where they grew up, compared to 47% of baby boomers (over 55’s).

While rentvesting is not a new thing, it is becoming a popular way for Australians who are increasingly priced out of the market to get on the property ladder earlier, by buying in more affordable areas and renting where they want to live.

Is rentvesting the easiest way of entering the property market?

As property prices in Australia’s capital cities grow, first home buyers have switched strategy and appear more likely to consider rentvesting and buying a property now, rather than waiting to buy their dream forever home.

When we surveyed 1,000 Australians, nearly half (48%) of 18 to 34 year olds and 46% of 35 to 54 year olds surveyed said they would consider rentvesting compared to just 28% of those aged over 55.

This shows a growing shift in the Australian attitude toward home buying where the smart thing to do is to invest in a more affordable property in locations where prices are more cost-efficient. It also hints at a desire to live in trendy areas. Millennials may be less willing to compromise on where they live and be banished to outer suburbia when they buy a home.

Is rentvesting the right move for you?

The answer to this question will really depend on your attitude to property ownership and living in a less desirable area.

Our 2018 research showed that younger Australians are less optimistic about home ownership with only 44% of millennials surveyed believing they will ever own a property outright, compared to 67% of baby boomers. This shift in attitude, paired with a growing number of first home buyers who are investors, tells us that many Australians are taking this new trend of rentvesting on board.

For many first time buyers, living in a trendy area close to the CBD is favourable but purchasing an affordable property close to the CBD is rarely possible. Renting close to the CBD and purchasing investment properties further away is viewed as a favourable solution to this problem.

What are the benefits of rentvesting?

  • Rental income: Earn when your property is tenanted.

  • Flexibility: Rentvesting gives you the flexibility in choosing where to live.

  • Capital gains: Grow your equity if your property increases in value.

  • Tax deductions: Potential to claim back deductions associated with property expenses.

  • Home loan approval: The strength of the application can be greater where a customer has a lower loan attached to their security property.

  • Flexibility: Depending on your investment strategy, your investment property should be paying for itself which allows greater freedom to move around and travel.

  • Build wealth sooner: Rentvesting allows you to get into the property market sooner and hence, start building your wealth earlier.

What are the drawbacks of rentvesting?

  • No First Home Owner Grant (FHOG): You may not be able to take advantage of the FHOG scheme with this strategy.

  • Higher home loan interest rates: Some lenders will charge higher interest rates for investment home loans.

  • Not living in your own home: As a tenant, you'll need to seek permission from the landlord if you are seeking to make changes in the property.

  • Less security: Your ability to stay in your rental home long-term is dependant on your landlord renewing your lease, for tenants with families it can be difficult to feel secure in your property.

The first home buyers guide to rentvesting

#1 Prepare for the unexpected

Remember investment income can sometimes be unreliable. If your tenants move and your property is vacant for a number of weeks you’ll need to cover the cost of your monthly home loan repayments in full. You’ll also need to pay for any repairs to the property such as any plumbing or electrical issues.

#2 Buy logically

Remember that the property you are investing in is not the property you are living in. When buying your first home, it can be a very emotional process but with rentvesting, you need to separate yourself from that process and focus primarily on what you set out to do.

#3 Research suburbs

In selecting which suburb to invest in, thorough real estate research is required. Get property reports for a number of potential properties to learn about previous rental yields.

Don’t disregard suburbs that may have had a bad reputation in the past. Thanks to gentrification and urban sprawl, suburbs which may have had a bad reputation 10 years ago, may have good property value now and be a great option for investors and first home buyers. It’s all about getting your foot in the door, so do your rental property research and never judge a book by its cover.

#4 Embrace change

Change can be difficult for many to grasp and get used to. You may need to be prepared to move around constantly. Renting can be viewed as shying away from putting down roots, though that’s not always the case. You can find great properties available for rent and may even have leases for up to 5 years.

A bonus is that you can change your lifestyle and scenery all the time and live in different places. It can be an exciting experience and may even suit your working and living situation.

#5 It’s what you do with the money that counts

Lastly, remember it’s what you do with the money that counts. If you earn a lower income than others, you might feel that growing a property portfolio and saving up for a property will take longer and be harder to maintain. That's not always true.

Don’t think about the amount you earn, but rather on how you use that money to obtain a steady cash flow. For those who earn an average income, you should aim to put 30% of your earnings into your monthly home repayments.

Rent to invest and then you can invest while you rent. These tips should assist you in understanding rentvesting and to decide whether it is best suited for you.

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