Most people have heard of rentvesting: it’s where you rent where you want to live, but buy a property where you can afford.
It means you can keep renting in the area where you have built your life, but to get your foot on the property ladder, you buy a property in a different suburb, city or even state.
You might be renting in an area where the rent is manageable, but the cost of buying is well out of your reach. This is the kind of scenario that rentvesting is perfect for.
Is Rentvesting really the Answer to Affordability Issues?
Here’s the reality: as property prices continue to climb upwards, many potential homebuyers have found themselves priced out of parts of major cities such as Sydney and Melbourne.
Property prices across the country are booming right now, so if you can’t afford to buy now in the area you’d prefer, it’s likely to be even less affordable a year or two from now.
That’s why many people are now exploring alternatives, to be able to get a foot in the door of the property market!
Is reinvesting a perfect solution? Not always. There are some downsides, which I’ll get to in a moment. But first, let’s discuss some of the benefits of rentvesting.
You Live Where You Want to Be – without Paying the Exorbitant Price. Renting a home is cheaper to sustain financially than buying in many areas. You might be paying $600 in rent on a home that costs $800,000 to buy. You will need a minimum of $80,000 deposit (or more to avoid paying LMI) and this is out of reach for many. But a $40,000 deposit on a cheaper investment property could be more achievable – and you don’t have to give up living in your ideal spot.
You Free Up Your Money to Invest Wisely. As a property investor, you want to have your finger on the pulse of where capital growth is happening. As a rentvestor, you may be able to purchase a greater number of inexpensive properties with long-term high growth and rental potential, rather than sinking all of your money into one expensive home.
You Don’t have to Put Down Roots Yet. If you’re at a point in life where you’re still not sure where you really want to be for the long term, rentvesting allows you to enter the property market without having to lock yourself down. You can still move, travel, even accept that job in another state, with the comfort of owning an asset (which your tenant is helping you to pay off).
You can Claim Tax-related Benefits. As a property investor, you’re able to claim deductions like mortgage interest, depreciation, insurance, real estate agent’s fees and maintenance. When you’re a homeowner, none of these expenses are tax deductible! This is one the key aspects of rentvesting that can really add appeal.
How does Rentvesting Actually Work?
The best way to explain it is through a hypothetical example.
A young couple in their early 30s began rentvesting. They want to keep living in a capital city for their careers, but buying a home in their local area was well out of their price range – and they couldn’t see a time when it would become possible.
Instead of buying in Sydney, they chose to rent a place in their ideal suburb, while saving up for a property located in the Gold Coast – an area they chose for its relative affordability, rental demand and growth potential.
They bought an investment property for $400,000. A few years later, they used the growth in that investment to purchase a second investment property for $500,000. Five years later, they refinanced both investment property loans, and withdrew enough money to use as a deposit on a small home in Sydney.
Thanks to rentvesting, they were able to eventually buy their own home in Sydney, and they also now own three property assets. Now 40, they have plenty of options ahead of them:
Sell all three properties and use the profits to buy a bigger home.
Keep all three properties, and use the growth/equity to buy a bigger home as their needs change.
Keep going in their current set-up and reassess as their needs change.
This is a far better outcome than simply continuing to rent and saving for a property deposit for years and years…
That said, rentvesting does come with a few risks and downsides you need to be aware of:
You Continue to be Tied to Your Landlord. As a tenant, you are not the one with control over your living space. That means that even when you are able to live in your dream location, you are not necessarily living in your dream home.
You’re at the Whim of the Rental Market. If your landlord wants to hike the rent, sell the property or make any other big decisions, it’s completely out of your control.
You Miss Out on Government Benefits only Owner-occupiers can Claim. You won’t be eligible for the First Home Owners’ Grant and stamp duty concessions, which can be worth tens of thousands’ of dollars. Unfortunately, once you buy a home as an investor, you lose access to their grants and discounts for good.
There’s pros and cons to weigh up on both decisions, but the bottom line is: if you dream of owning a property, now is the time to look at all the options and make a plan to move you forward. If you’d like to find out your borrowing power and chat about your options, contact us today for an obligation-free chat on 1300 855 022.
Confidence in Sydney’s rental market is starting to return as vacancy rates decline, according to the latest report from the Real Estate Institute of New South Wales (REINSW).
The vacancy rate in Sydney dropped to 3.4% in November, down from October’s rate of 4.3%. This is the lowest vacancy rate Sydney recorded since the first quarter.
All regions in Sydney reported declines in vacancies, with the inner-ring region dropping to 4.6%, the middle-ring to 4.4%. and the outer-ring to 1.8%.
“It’s been a long year and one that’s been full of challenges for everyone. When COVID-19 hit, many tenants were faced with the prospect of losing their jobs and had to make some hard financial decisions,” said Tim McKibbin, CEO of REINSW.
McKibbin said things appear to have started to settle, as people begin to return to work while other adopt a hybrid pattern of working.
“Overall, there’s a renewed confidence in what the future holds and this has had a flow-on effect to the residential rental market,” he said.
Vacancy rates in most regional areas in the state are also on the downtrend.
“The key message from this month’s results is that there is light at the end of the tunnel for both landlords and tenants,” McKibbin said.
A separate report by SQM Research, however, showed that rents continued to fall over the past month. Still, there are signs that could point to a reversal in the abundance of listings in Sydney CBD.
“They are still very elevated. But we could be starting to see some of the population moving back to the CBD and inner-city locations,” said Louis Christopher, managing director of SQM Research
New research shows that in many suburbs across Australia, it may actually cost you less money to buy your home and pay a mortgage, rather than renting.
The research, released by Aussie Home Loans in conjunction with CoreLogic, reveals that many Aussies would actually be better off making home loan repayments than paying a landlord.
In fact, more than half of the country would be financially better off if they owned their home!
The Buy vs Rent Report has analysed suburbs across Australia where mortgage repayments are cheaper than rental payments, and it found that over half (52.2 per cent) of Australian suburbs would be cheaper for homeowners than for renters.
The research is based on:
A 30-year loan term
Principal and interest repayments
35% three-year fixed rate loan
But even those who prefer a variable interest rate may be better off.
Based on a variable home loan rate of 3.65%, the report found that 1 in 3 households (or 32.9%) would find it cheaper to pay down a mortgage than pay rent on a house.
These results are hardly surprising, given the fact that mortgages are currently the cheapest they’ve ever been. Interest rates are now at lows we’ve never witnessed – I’ve certainly never seen mortgage interest rates this cheap, and I began working in the industry 30 years ago.
The really interesting part to me is that these interest rates are also quite conservative. Since the last RBA rate cut, it’s now possible for us to find you a fixed-rate home loan with an interest rate beginning with a 1.
Even for those of you who prefer the flexibility of a variable rate loan, there are many rates on the market that are far more competitive that 3.65%.
In any event, this research is good news for you, as it means your dreams and aspirations of buying your first or next home may be closer than you think.
How close are you to Buying your Home?
For those who are interested in buying a home, there are a few things you need to know.
First of all, the good news: the requirements for saving a deposit for first homebuyers is now far lower than it has been in the past.
While many banks and lenders would prefer to see a 20% deposit, in the major capital cities at least, this is something of an unrealistic target.
The median property price in Sydney has been hovering around the $1m mark in recent years, which means a 20% deposit is worth around $200,000 – a figure that is far outside the average Aussie’s ability to save.
Enter the First Home Loan Deposit Scheme (FHLDS) – a program run by the government, which allows first-time buyers to buy a home with just a 5% deposit, without having to pay lenders mortgage insurance.
As long as you can provide evidence of at least 5% in genuine savings, many banks and lenders will consider your loan application.
Now, what does genuine savings mean? It could be comprised of:
Small, regular deposits from to your savings account
Your tax refund
Compound interest and savings from a term deposit or high-interest savings account
Deposits to your account after selling unwanted goods, like tablets, iPhones or furniture you no longer need.
If saving a 5% deposit isn’t quite achievable – or if you’re not a first-home buyer, so you can’t access the FHLDS – you may be able to buy a home if you’re parents are willing to offer a family guarantee. This essentially means they’re giving the bank some security over their own property, to help you get a loan for your property.
There are a number of other grants, schemes and incentives to help buyers get into the property market, including the First Home Owners Grant (FHOG); Home Builder, which provides owner-occupiers with a grant of $25,000 to build a new home or substantially renovate an existing one; the First home super saver scheme, designed to help you save more money for your deposit; and there are also a number of first-home buyer discounts and concessions off your stamp duty.
These grants and schemes offer the chance to save tens of thousands of dollars off the purchase price of your home – and with interest rates this low, make the prospect of home ownership the most affordable it’s been in years.
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation or needs before making any decisions based on this information.
Comparison Rate calculated on a secured loan amount of $150,000 for a term of 25 years. WARNING: This Comparison Rate is true only for the example given and may not include all fees and charges. Different terms, fees and other loan amounts might result in a different Comparison Rate. Fees and Charges Apply. Terms and Conditions are available on request.