How to rentvest your way into the property market
Rentvesting - where a person rents in an area they want to live and buys an investment property in a less expensive suburb - is becoming an established practice.
A third of investors are now first-time buyers who have not yet bought their own home, a Mortgage Choice survey has found. And the figure has doubled in the past three years.
Rentvestors, first identified by real estate agent LJ Hooker as one of the key trends for under-30s, don't want to give up the amenities and lifestyle that living close to major cities - and their workplaces - provides. The problem is they can't afford to buy in those areas.
How does rentvesting work?
The fact that house and unit prices have risen far faster than rentals over the past decade means it's cheaper to rent than buy a home of the same value in many areas. Value growth across all capitals was 72% in the 10 years to January 2016, whereas rental growth was 50.7%, according to research from CoreLogic RP Data.
Melbourne, where prices rose 100.9% and rentals grew by only 43.4%, shows the greatest divergence. For example, a young professional women wanting to live in a two-bedroom, two-bathroom apartment in the inner Melbourne of suburb of Carlton finds on RealEstate.com.au that she can rent a suitable property for about $540 a week, or $2340 a month.
The cheapest similar property to buy costs $550,000. If the buyer has a $50,000 deposit she will need to borrow $554,670 to cover all buying costs, according to ratecity.com.au. Over 25 years at 4% this loan will cost $2928 a month - almost $600 more than renting.
Many rentvestors are well aware of the theory that rent money is dead money so typically they use the funds they save by renting to invest in an affordable property in the suburbs. For example, if the Carlton renter wants to invest in a Victorian property, she could consider a three-bedroom home in Leopold, part of Greater Geelong.
Leopold, 86km from Melbourne, was one of the areas identified by real estate expert Terry Ryder as a rising star hotspot in Money magazine's Top 50 edition (February 2016).
The median price of a three-bedroom home in the suburb is $350,000 and the rental yield is 5.2%, reports realestate.com.au. If the Carlton renter used her $50,000 deposit she could buy a median-priced property in Leopold with a loan of $336,420 costing $1736 a month, or $20,832 a year, over 25 years at 4%pa (ratecity.com.au).
Assuming the property can be rented at the 5.2 % median yield, yearly rental income will be $18,200. Adding the $600 a month saved by renting gives a total of $25,400. Even if the rental income is discounted by 25% to account for costs, bringing it down to $13,650, the owner will still not have to dip into her pocket beyond contributing the savings made by renting.
Be sure to choose the right suburb
The trick to being a successful rentvestor is to buy well, which means heaps of research. You need to look for a high-growth area, preferably one that will benefit from planned infrastructure.
Go for low-maintenance, high-yielding properties close to public transport, schools, shops, hospitals and other amenities.
Some rentvestors may plan to live in the home later when their lifestyle requirements have changed but don't let this influence your judgement. Going for growth is the best strategy to build wealth.
Indulge a little
Another advantage is that rentvesting gives ultimate flexibility for work as well as the long-term benefits that property ownership bestows.
People can pursue work opportunities interstate or overseas without a debt millstone around their neck and the problem of what to do with the family home when they move.