It’s a buzz word that’s only been coined in recent years and that’s because it’s a relatively new trend that allows cash-strapped Aussies to get a foothold in the property market – without compromising on the lifestyle choice of where they live. I’m talking about “rentvesting”.
In this scenario, you rent where you want to live and buy an investment property where you can afford.
Rentvesting has become particularly relevant in those towns and cities where prices have skyrocketed out of reach for so many, leaving fewer options for those determined to crack the property market. It’s a clever solution to the housing affordability issue.
The beauty of rentvesting is that it allows you to get your foot on the property ladder by purchasing in an area where you can afford to buy (meanwhile letting someone else pay off all or the bulk of your mortgage), but still retain the flexibility to rent and live exactly where you want to. For freedom-loving millennials, it’s a particularly appealing concept. No compromise to lifestyle = big tick!
You also have the option to either renovate immediately or wait a couple of years to save some cash, then do a quick cosmetic reno that will manufacture instant equity and bump up your rental income.
So, let’s look at some of the main advantages of rentvesting and who it appeals to most.
A means to an end
Rentvesting may not be a long-term thing for you. It can simply be a means to an end, whether that’s eventually buying your own home or leveraging that first property to accumulate more.
Think of it as a way to break into the property market NOW with a smaller deposit (for an investment property in a more affordable area), as opposed to waiting several years to save for something more lavish.
For example, if you’ve scraped together a deposit of $100,000, but live in a suburb where the median price of houses is $1 million, then clearly you’re priced out of that suburb – and probably the surrounding ones, too. It’s going to take you a decade of saving to even get close.
Shift your buying focus to a capital-growth area where there’s a more affordable median price, say $400,000 for example. Hone your research and find a gem that only needs a cosmetic spruce-up to add value… bingo, you’re now on the property ladder, but you can still stay put and enjoy the suburb you truly love.
Once you accrue decent equity in your investment property and it increases in value, then you have a solid foothold in the property market to springboard straight into your very next property investment. You’ve enjoyed the freedom of renting, while also making good money from your property investment. You’ve achieved your goal.
A way to build a portfolio
You might be perfectly happy renting as a long-term option and decide to invest in property as a long-term retirement plan. (See my blog on Why a Property Portfolio Beats Flipping)
By taking the emotion out of your purchase decisions, you’re more likely to make a smart investment decision. Throw your net (and research) wide, and you’ll discover fantastic opportunities for an investment grade property in pockets everywhere. You’re now not limited by the comfort zone and emotional importance of buying a home. You’re embarking on the buy, renovate and hold strategy, with the aim of leveraging equity to progressively buy more properties. By the time you retire, you’ll have a nice portfolio of properties that kicked off with rentvesting.
An alternative for first home buyers
The Aussie dream of owning your own home has been turned on its head over the last decade. For the current generation of would-be home buyers, the ratio of what they earn versus what they can afford to buy, has made property ownership a more challenging task for many. At the same time, the rental market has flattened in many areas, meaning renters can pick and choose. Put these two forces together, and it means you can rent a place you could never afford to buy. Whatever money you have left over, you can invest in a property that you can afford.
For example, let’s assume that buying your dream “first home” requires mortgage repayments of $4,000 a month. You can’t afford that on the salary you’re on and the banks won’t lend you that kind of money anyway. But if you rent a home in the same area, rental payments could be $2,200 a month, leaving you with $1,800 per month to invest elsewhere or put towards a deposit.
We also can’t forget about the first home buyer government incentives you can take advantage of to give you a financial leg-up. Use the money to buy a modest property somewhere you can afford, and provided you’ve bought smartly in the right areas and the right property, you can cash it in down the track and buy your own home. You’ve made the Aussie dream come true by rentvesting.
The bottom line
The notion that “rent money is dead money” is a thing of the past. Think of it as a smart investment strategy that allows you to crack into a difficult property market at a price you can afford. You can buy sooner (renovate now or later) and kickstart your journey to financial freedom.