With the entry cost of purchasing a first property seemingly getting more and more out of the reach of many first home buyers we are seeing a surge of Rentvestors. So what is rentvesting and is it a more affordable option to get onto the property market?
What is it?
Rentvesting is where buyers decide to continue rent a home in their desired location and purchase an investment property in a more affordable area. It’s been popular in places like Melbourne for a number of years and now Western Australia has seen a huge spike in prices it is starting to become an attractive choice to many here in Perth. This trend challenges the more traditional practice of first homeownership and offers a viable alternative for those wanting to enter the property market without sacrificing their lifestyle.
While it doesn’t seem to make sense at first, I mean why would you pay off a mortgage and rent at the same time? Wouldn’t it be easier to just buy your home? There’s no one right answer. It all depends on your investment appetite, your budget, life stage and the lifestyle you want. For some it’s lifestyle others it’s the first steps of long-term wealth building approach.
For example, perhaps you’re single and you want to get into the property market but the home you want isn’t in your price range. Or maybe you’re in a great rental property and the timing isn’t right for a move. Or you’re happy with inner-city living for now, even if you know down the track you’ll want to move to a more spacious home further out.
Rentvesting can give you the best of both worlds. You can buy a property and rent it out to cover some or all of your ownership costs, while continuing to rent the home where you live. If your investment property is earning you a profit, you could even use that income towards your home rental costs. You may even benefit from the rising property market and build some equity quickly.
You might end up spending around the same if you were just renting or if you were living in a home you owned. The difference is, you can live where you want and get your foot in the property market.
Rentvesting pros and cons
Buy to live or Rentvest?
Which strategy can potentially get a better return, we look at a recent example of a buyer named Jenny, who is 29.
She works for a mining company earning $90,000 per year and is renting with a friend. She’s been diligent with her money and has savings of $120,000. But even with this deposit, her budget isn’t enough to buy a house in an area where she wants to live. So, is it better for her to rentvest?
The reality is, if Jenny were to buy-to-live, the maximum amount she could borrow would be $480,000, based on her income and living costs. So, if she put down all of his savings as a deposit (factoring in purchase costs as a first home buyer), her maximum purchase price would be $575,000.
If Jenny were to rentvest instead, she could use the rent she receives, plus some of her own money, to increase her borrowing capacity. In this case, the maximum amount she could borrow would be increased to $610,000, which brings her maximum purchase price to $685,000.
Is it wise to increase borrowing power?
Whilst it’s really important that people shouldn’t overstretch themselves, if they can borrow more money from the bank, they can typically purchase a better property. A better property is, of course, a better investment asset, which means it should deliver a better return over time.
Is all that money wasted being spent on rent?
If Jenny chose to continue renting with her friend, then she will be spending an additional $16,640 per year instead of buying his own place. But that overlooks that she will also be receiving rent – more than $33,000 – from her new investment property.
What this could mean is that she can hold a higher-value asset and, even with the added costs to hold the investment property, Jenny will be in a more solid cashflow position than if she just bought a lower valued property.
What do the numbers look like?
There are definitely differences when it comes to purchase costs as shown in the illustration above. You forfeit any first home buyer rebates, schemes if you opt to invest.
You would also need to factor in that there would usually a gap to be paid between the difference in the mortgage repayments and the rent received, along with factoring in rates, insurance and management fees.
In Jenny’s case if she were to purchase an investment property as above, there would be a negative difference between the rent of $650 per week and the mortgage payment of $871 per week (principal and interest at 6.34% variable) or $776 per week (interest only at 6.64%).
IS rentvesting a good idea for you?
With the market anticipated to rise further rentvesting to many a happy compromise between buying and renting where you can do both — build an asset and still get to live where you want to. But is it the right long-term investment strategy for you? That will depend on a number of factors such as where you buy and rent, the reliability of your tenants as a source of income and your ability to service a property loan on top of your own rental commitments.
Before you make a decision, it’s always a good idea to talk to a mortgage broker and a financial planner. They can crunch some numbers with you and help you arrive at a conclusion.
If you’re thinking of investing in property, it makes sense to get professional advice from a qualified financial planner and definitely you need expert tax advice.
Want to check out your options then get in touch today.
Disclaimer: The figures used are for general illustration only.