Rentvesting – What is it, and how can you use it to your advantage?
More and more Australian investors are now classified as ‘rent-vestors.’ So what exactly is this growing trend, and how can you join the movement and use this strategy to get into the property market?
Rentvesting is a strategy that allows people who want to get a foot on the property ladder, and is increasingly popular with Gen Y-ers, or those who are looking to buy their first property. It allows people to invest in a property in an affordable area, but rent where they want to live. Such approach means that rent-vesters can be flexible in their purchase, continuing to rent in an area that suits their current lifestyle (in some cases, continuing to live with parents or friends), and buy a more affordable property to rent out. It is particularly popular for people who live in inner-city areas in cities like Sydney, for lifestyle, family, or career reasons. Whilst rent-vesting has both its pro’s and con’s, the most prominent advantage is that you don’t have to sacrifice your favoured living location to buy a house. Lauren Fine, Head of Home Ownership at Westpac says “rentvesting is a strategy to attain the ‘great Australian dream’ of home ownership and was popular among younger buyers who could rentvest to get into the market without sacrificing their lifestyle.”
Why not just buy a house and live in it?
Let’s consider the situation of Ben. Ben is a loveable yet completely fictional good guy who rents in Bondi, and loves it. The beach, the organic foodstuffs, the cold-drip single origin coffee on a Sunday morning – he wouldn’t change it for the world. However, Ben is getting tired of spending his entire paycheck on overpriced dinners, and wants to start planning for the future (you go Ben). After discovering that the median house price is $2.4m, he realises that there’s little to no chance of him getting his first home, and first sizeable investment, in his dream suburb. So, he decides to buy a reasonably priced 3×2 unit in a more affordable area of Western Sydney, well serviced by amenities and transport, which can be easily rented out. Ben has taken the first step to building his property portfolio, and obtaining financial freedom, whilst continuing to rent and enjoy his lifestyle by the beach.
Ben may be fictional, but his situation is not. The average Australian would find it very difficult to scrape together the 10% deposit for a $1.2m house (Sydney’s average price), let alone the $240,000 required for a deposit on an average house in the elusive Bondi area. Rentvesting opens opportunities to invest in more affordable, often more regional areas, at half the price of an inner-city home. It provides a feasible pathway to earning a rental income and the possibility of capital gains, as well as building a solid asset portfolio.
Who is suited to rentvesting?
According to a 2017 white paper from Ispos, commissioned by Westpac, the average rentvester shares a few defining qualities that set them apart from the average owner occupier; including being of the Generation Y (61%), living in metro areas (81%), and likely to be single (41%). Interestingly, they are also far less likely to be emotionally attached to the property – they are part of the group of Aussies who no longer think that owning your own home is the only way to a successful financial future. However, the majority of the group surveyed for the report (77% of people) were looking to buy their own home to live in as their next investment, which goes to show that rentvesting isn’t the first and last step that people will take in their investment journey, and having a home to call their own is still the ultimate goal of many.
Statistics aside, rentvesting is likely to be a suitable strategy for those who:
- Have clear financial objectives for the short, medium and long-term
- Do not have equity in an existing property to leverage
- Are willing to forego emotional attachment to an investment property, in favour of viewing the house for its rent-generating capabilities
- Want to live in inner-city areas but cannot afford the deposit to buy a house in that area, yet do not want to sacrifice either their lifestyle or financial goals
- Have carefully considered all of the challenges involved. This applies to any investment decision, however those who are new to rentvesting would definitely benefit from some additional assistance to make decisions which are suitable for them and their objectives.
Where to from here?
The strategy of rentvesting is not a new one, however with housing affordability becoming increasingly challenging, it looks like the approach will only continue to grow in popularity. Before making any decisions, it is important to be fully aware of your financial situation and capacity, including and understanding of the purchase costs and your financing opportunities.
The next step is to do your homework – which areas would be suitable to buy an investment property to rent out? It is important to know which suburbs are appealing to tenants, have a high rental yield, and long-term capital growth prospects. After all, rentvesting is all about finding the right property to begin building your portfolio.
Interested in hearing more about how rentvesting could help you to get into the property market? We’d love to help out. Use our easy scheduling system to book an introductory call or obligation-free appointment, or email us at firstname.lastname@example.org.