posted in: Building Wealth
What is rentvesting and is it right for you?
What is rentvesting and is it right for you?
If you’re keen to get on the property ladder, but are concerned that you’re being priced out of the area you want to live, rentvesting may be a good strategy for you.
Rentvesting involves continuing to rent where you want to live while investing in a different property market with a lower barrier to entry, decent rental yield and good capital growth prospects.
The benefit of this approach is that you are able to get into the property market and build wealth now, without sacrificing where you live. You can continue to live close your friends, family, work, schools, restaurants, transport and so on, all while owning an investment property that is generating income and capital growth.
When might rentvesting be the right strategy for you?
- You’ve been priced out of the property market in which you live
- Property prices where you live are growing quickly and outpacing your ability to save for a deposit. It feels like you’re always playing catch up
- The only homes you can afford in the area you want to live require an extensive renovation which you can’t afford or aren’t interested in doing
- While you can’t afford a deposit where you live, you still have a decent amount of savings in your bank account and you want to take advantage of the power of leveraging (borrowing) to invest
- You love where you live and don’t want to leave
- You enjoy the benefits of renting including the freedom to move, less maintenance and lower or zero cost for things like insurance, land tax and strata fees
- You’re looking for an investment strategy which will allow you to build enough equity to be able to eventually buy your own home
- You don’t want the pressure of taking out such a large mortgage in the area you wish to live
Rentvesting is great, but sometimes buying a home can be a better option
Rentvesting isn’t for everyone. Here are some scenarios where it may be better to buy a home
- Firstly and most importantly – you’ve got enough deposit and can afford to buy a home in a location you’d be happy to live
- Your heart is set on buying a home as that will meet an emotional requirement that is the most important thing to you and your family. Having the security of knowing you’re locked into a particular suburb or a school catchment can provide a lot of comfort for some families
- You have a desire to renovate and you’d like to put your own personal touch on the place you live in
- You don’t have the appetite for moving house if your landlord decides to sell or move back in
What should you consider before rentvesting?
- Examine property market cycles
Property market cycles assess movements in different property markets around the country, revealing which areas are on the rise, stagnating or declining. What cycle is your target property market in? Ideally you want to buy in areas where prices are at the bottom of the market or beginning to rise, and avoid areas at the peak of the market or stagnating.
For example, in 2002 Brisbane prices were at the bottom of the market, peaking by 2011. If you had bought a property in Brisbane in 2002, by 2011 you would have experienced growth of 143%. Sydney, on the other hand, experienced 27% growth in that same period. Clearly Brisbane was the better investment at that time, based on where both markets were in their property cycle. Compare that to 2011 to 2018, when Sydney experienced 100% growth compared to Brisbane, which experienced 24% growth. Each property market’s position in their property cycle was reversed – indicated in the graph below showing median house price movement.
It’s important to watch the growth cycles and make the right choice at the right time when investing. With Sydney prices growing rapidly and expected to hit a peak within the next 6-12 months, we should then see some other markets around the country that have been more dormant, start to enter a growth phase.
Now may be an ideal time for Sydneysiders to invest in other property markets to build enough equity to allow them to eventually buy into the Sydney property market.
- Don’t get hung up on negative gearing
With interest rates so low at the moment, you may find that you’re actually able to positively gear your investment. What this means is that the investment property may not cost you anything to hold and will be cash flow positive.
While in this case you won’t be able to take advantage of the tax benefits of negative gearing, you will benefit from a positive cash flow. Provided you’ve secured a good property for long term capital growth, then having a positive cash flow and paying some tax is better than having a negative cash flow and claiming tax back.
- Make an informed, not an emotional decision
It’s important you’re guided by the data when choosing an investment, rather than focusing on what you like. You won’t be living in your investment property, so it’s less important what you think of the area or property, and more important to understand the capital growth and rental income prospects.
Do your research into the particular market including looking at vacancy rates, asking rents, supply and demand in the area (for e.g. how many listings for properties are there in the area? Are many people showing up to open houses?), whether the area and property type mostly attracts investors or owner-occupiers (it’s best to invest in areas an property types which appeal to owner-occupiers as these tend to perform better), population growth and infrastructure investment.
Want to find out if rentvesting might be the right option for you? Get in touch with us for a free consultation on your financial goals.