Rentvesting, heard of it? The long and the short of rentvesting is renting where you want to live & buying where/what you can afford.
Conventional wisdom is that a rentvestor is typically a home buyer who rents where they want to live but can’t afford to buy, and buys an investment property somewhere more affordable, generally in the middle to outer ring suburbs where the rental return is better and rent covers most or all of the mortgage, however often at the expense of capital gain.
There are many others who rentvest – the first home buyer who is told by the bank they can’t afford to buy, but rent in the same suburb they currently live.
There are also those who choose to rent, because of their travel needs, but have a home in an area they used to live, or where they intend to settle.
A recent Mortgage Choice survey shows rentvesting has increased from 21% of investors to 37% of investors over the past 12 months alone. With few out of pocket costs and little impact on lifestyle it is a savvy way to enter the property market.
There has been a lot of talk recently about Gen Y’s feeling locked out of the housing market and baby boomers telling them to suck it up because you can’t have everything and maybe if you got a better job or moved to the country you wouldn’t be so locked out. Rentvesting is the perfect solution for Gen Y’s to have their cake and eat it too (get into the property market without sacrificing lifestyle)!
However, like most things there are pro’s and con’s to renting that need to be considered.
- Lifestyle – you don’t have to sacrifice it. Renting where you want to live means you can still access city/beach/family/cafes/pubs/work etc easily.
- Lower deposit – the cheaper the house, the cheaper the deposit. The cheaper the deposit, the less time it will take to save said deposit.
- Flexibility - live where you want to live for as long as you want to live there. Need another bedroom? No worries. Decided you’ve had enough of the south and want to grow a beard, and cross the river – you can! Without the entry and exist costs associated with buying and selling.
- Should your circumstances change you also have the flexibility to move up or down to a property that is better suited to your current financial position.
- Negative Gearing – Yes, we are talking about negative gearing…. again. However, interest payments and other expenses involved in producing the income (rent) from an investment are tax deductible.
- Leverage – also known as accrued equity. Once you’ve got your foot in the door it becomes much easier to buy other properties. Other properties like your dream home or more investments.
- Stability – at the end of the day renting is always temporary and no matter how good a tenant you are the landlord always has the ability to sell your (their) property, with 60 days’ notice of course.
- Less Choice – You’ve retained your inner suburban lifestyle benefits but you also want to live in a nice house. Premium style properties do tend to be owner occupied so there can be fewer on the rental market.
- Limited changes – Unless you have the chilliest of landlords unfortunately painting that pink feature wall or hanging all your art, may not happen.
At the end of the day the question is: which property choice is going to be the most likely to help us achieve our goals? Then the questions: can we really afford it; have we done our research; which areas have low prices to buy but also have solid rent rates and a strong likelihood of increasing in value are the ones that really matter.