As house prices soar in several Australian cities, first time homebuyers are increasingly turning to the strategy of rentvesting to get their foot on the property ladder without compromising on where they want to live.
What is rentvesting?
A new research commissioned by Well Home Loans found that first home buyers in Sydney and Melbourne may be better off renting units in their chosen suburbs and buying high-growth investment properties in regional areas or outer suburbs. This is also known as rentvesting – buying an investment property where you can afford it and living on rent where you want.
There are several potential benefits of rentvesting, such as getting into the property market sooner while continuing to enjoy the freedom of wherever you wish to stay. When done right, rentvesting can also help you build wealth for your dream home.
If you purchase a high-growth property with a good rental yield, it could cover its own mortgage costs to some extent. The equity that you build over time could be used to finance your dream home in future. However, despite its benefits, rentvesting may not be the right strategy for everyone.
When you rentvest, you’ll be paying rent for the house you live in on top of the mortgage repayments for your investment property, which could strain your finances. It’s advisable to run the numbers by your budget to ensure you don’t stretch yourself too thin.
Rentvesting tips to get your money’s worth
A smart move calls for smart planning. The following tips will help you plan your purchase better.
1. Put a budget together
Whether you plan to be an owner-occupier or an investor, it’s essential to put together a budget to get a fair idea of how much you can afford to spend.
Understanding your repayment capacity will also help you figure out the amount of money you may be able to borrow. Knowing this amount makes it easier to narrow down your property search to areas that fit your budget.
2. Do your research
Purchasing an investment property anywhere you can afford isn’t ideal. Instead, it has to be a well-planned decision to help you get the maximum worth for your money. If you wish to buy an investment property, follow the trends in the property market and zero down on areas in your budget that are predicted to grow. You should also compare rental yields in these areas to narrow down your list to those with the highest rental income.
Research commissioned by Well Home Loans listed several suburbs for investors who plan to rent in the inner city and purchase in a high growth area.
According to the data released by the report, a first home buyer with a budget between $500,000 and $600,000 (which is about the price of a unit in inner Sydney or Melbourne) could purchase a house in:
- Goulburn and Cringlia in NSW
- Nambour in QLD
Those who can spend between $600,000 and $700,000 may consider purchasing in areas like:
- Edgeworth and Koonawarra in NSW
- Coombabah, Meridan Plains, Caloundra West, Lower Beechmont and Rothwell in QLD
For first home buyers who can shell out between $700,000 and $800,000, the following suburbs in QLD topped the list for the best rentvesting opportunity:
- Highland Park, Merrimac, Little Mountain, Forest Glen, Nerang, Pacific Pines, Bli Bli and Sippy Downs
3. Get your finances in order
To purchase a property, you generally need to save a deposit equalling at least 20 per cent of its price. If you are buying an investment property, you may need a higher deposit depending on where you are buying and the lender’s policies.
A lender will also look into your income and expenses to assess your ability to pay off the loan. If you have multiple ongoing debts or your expenses are unusually high, you may find it difficult to qualify for a loan. It could help to create a household budget to identify and eliminate unnecessary expenses. The money you save could be used towards growing your deposit. You may also consider opening a high-interest savings account and put money in it regularly to demonstrate responsible financial behaviour, which could help increase your chances of qualifying for a loan.
4. Seek professional advice
Even though rentvesting could help you realise your dream of owning a property sooner, it is not the right strategy for everyone.
Everybody’s situation is different, and it could be helpful to seek professional advice to understand whether rentvesting is right for you or not.
Purchasing a home or renting one is as much of a financial decision as an emotional one. Before you decide to rentvest, it’s advisable to check your budget and ensure you can afford to rent and have a mortgage. If you need help, you could speak with a financial advisor or even a mortgage broker who will crunch the numbers for you and guide you on your investment strategy.
If you have queries around a home loan product or want to learn more about rentvesting, it could help to speak with a broker or ask a Hashching expert for their opinion.