Whether you are in the process of purchasing a new home and are saving up for the big move, or you already own a property, but you want to live somewhere else, with the flexibility of residing in a suburb you desire, ‘rentvesting’ could be an option for you.
The great thing about ‘rentvesting’ is you can rent where you want to live whilst earning a ‘rental yield’ and gaining capital growth from a different property. This approach allows you to enter the property market and build wealth without having to move. You can stay in a suburb where you prefer to live, close to work, schools, restaurants, public transport etc., while owning a rental property that generates income and capital growth in a different location.
When might rentvesting be the right strategy for you?
The property market where you live is not competitive.
Property prices are increasing, so you are constantly trying to save for a deposit.
The only homes you can afford in the neighbourhood where you want to live to require a large deposit.
Despite being unable to afford a deposit, you have a nice amount of savings in your bank account and want to take advantage of the power of leverage (borrowing to invest).
You love where you currently live and don't want to move or the opportunity to purchase isn’t available where you reside.
You don't want to take on such a large mortgage in the area you wish to live.
Regardless of your situation, it is essential to find an investment strategy that will allow you to eventually build enough equity to buy your own home.
Rentvesting can be a great option, but sometimes buying a home is the better option. Rentvesting isn't for everyone. Here are some scenarios where purchasing a home can be a better option:
You have enough savings and money to buy a home in an area where you'd be happy to live.
You are determined to purchase a home as it will fulfil an essential part of your life. You want to renovate and add your personal touch to your home, and;
You don't want to be locked into a suburb or school catchment.
You want to avoid the risk of having to move if your landlord decides to sell or move back in.
Are there any considerations before rentvesting?
Examine property market cycles.
Different real estate market cycles reveal which regions are on the rise, stagnating or declining. Where is your target real estate market at this moment? When buying a home, try to opt for areas where the price is at the bottom of the market or rising rather than the peak or stagnant areas.
In 2002, Brisbane prices were at the bottom of the market but peaked by 2011. By 2011, the value of a property in Brisbane would have increased by 143% if you had bought it in 2002. On the other hand, Sydney's economy grew by 27% during the same period. Based on where both markets were in their property cycles, Brisbane made the better investment at the time. This contrasts with Sydney's 100% population growth from 2011 to 2018, compared to Brisbane's 24% growth. The graph below shows how median house price movements in each market were reversed in each cycle.
Investing requires watching the growth cycle and making the right choice at the right time. The rapid growth of Sydney prices, anticipated to peak within the next six to twelve months, will lead some of the other markets in Australia to start growing again.
Investing in other property markets may be a good idea now for Sydneysiders to build enough equity to buy in the Sydney market in the future eventually.
Don't get hung up on negative gearing.
You may be able to positively gear your investment right now because interest rates are so low. This means that the investment property may not cost you anything to maintain and generate a positive cash flow.
While you won't take advantage of negative gearing's tax benefits in this scenario, you will benefit from a positive cash flow. Having a positive cash flow and paying some tax is preferable to having a negative cash flow and claiming tax back if you've secured a solid property for long-term capital growth.
When making an investment decision, it's critical to focus on the data rather than your personal preferences. Because you won't be living in an investment property, it's more necessary to comprehend the capital growth and rental income potential than to think about the neighbourhood or property.
Look into the specific market, including vacancy rates, asking rents, supply, and demand in the area (for example, how many property listings are there?).
Do you want to see if rentvesting is a viable solution for you? Contact us for a free consultation on your financial objectives.
@Paul Barrett of Absolute Wealth Advisers is one of Australia's most experienced Private Wealth Managers. He is a financial expert in high net wealth divorce, estate management and inheritance. Contact him here