Rent The Property You Couldn’t Afford To Buy And Invest Where You Can
You may have heard the term “rentvesting” in recent times. It’s become a fashionable way to describe the practice of renting where you live and investing in property elsewhere to build wealth.
It’s a strategy that has grown in popularity for first home buyers who have been priced out of the owner-occupier markets but still want to get on the property ladder in some form.
Some do it because they figure that accruing equity now will allow them to leverage into a dream owner occupier home later down the track.
Others do it because they can rent a better place, in a better location, than they could afford to buy, so they may as well enjoy a great lifestyle while still making astute investments.
But long before anyone tried to put a (pretty underwhelming) name on this strategy, b Invested founder Nathan Birch was “rentvesting” like crazy. Or as he put it…simply “investing” so that he could live life on his own terms as soon as possible. In fact, he spent a good decade buying investment properties and building equity, before he was able to use his earnings to build himself a dream home on a huge estate.
Deposits are insane right now
One of the biggest roadblocks to first home buyers in these times of rocketing prices and super low interest rates is being able to save a deposit.
Have you ever tried to save $200,000 plus, while getting less than 1% return on your cash and while wages are going nowhere? For a lot of people it would take decades…. In which time a couple more market cycles would have seen the goalposts move and prices still be out of reach.
Meanwhile, the deposit on an investment property in an affordable market is much cheaper. Investing in one at the right time may see you save a deposit for a future home much quicker in the form of equity.
If you look at places like Sydney, which, according to REA data experienced 20% growth in the past year on its median house value, it means a regular homeowner made around $150,000 in equity over the past 12 months.
An investment property purchased for much cheaper wouldn’t have made that much equity, but much of Australia had at least 10% growth in property values for the year. That’s 10 times the return you would get from a savings account at the moment.
Use equity gained to leverage into more investment properties and then add the rental income to your kitty and you could find yourself laying down much more than a 20% deposit on a great owner occupier many years before you could ever save that much.
Try before you buy
While you are building your portfolio of affordable investment properties, which should hopefully be positively geared, you can use your time as a renter to try a few different locations to see where you might like to buy in the future.
You might enjoy renting in a suburb that’s great for lifestyle and where it’s much cheaper to rent than pay mortgage repayments.
You can often get a better property as a rental too. If you are renting a family home, for example, there is not as much competition from other renters because most of them are vying for units. Prices reflect this and you may get a large house for only a relatively small amount more rent than a 2-bedroom unit in the same suburb.
You won’t have to pay the maintenance, stamp duty and holding costs on your rental property. You will have to pay those for any property you invest in, but will be able to claim a lot of those expenses on tax.
Is it for me?
If you want to go down this path, you need to be prepared to go against the flow. You will have to come to terms with the fact that your rental property belongs to someone else, so may not feel 100% like your home. Your landlords might decide to up the rent or move you on when they need the home for something else. So, you must try to be emotionally prepared for this outcome.
You may also be criticised by family or friends for missing out on the Australian dream.
But as long as you are investing to build your wealth and have a clear strategy when it comes to what you want to achieve, you can reap the rewards.