August 12, 2019

Rentvesting as an investment strategy

Rent-vesting is an increasingly mainstream strategy for those seeking to break into the property market or expand their portfolio without it having an impact on their lifestyle.

It breaks the traditional approach of buying a property and living in it. Instead, you rent in the area you love and buy in the suburb you can afford.

Rentvesting is becoming popular with young buyers who have good jobs but insufficient equity and cash-flow to buy property in areas such as a CBD or inner-city that cater to their desired lifestyle.

But it is not exclusive to young buyers. Research from real estate group LJ Hooker, shows that the 35-55 demographic make up more than half of the rentvestor community. Some 43 per cent of respondents say they adopted the strategy because they work or study in a different area from where they can afford to buy.

One approach by rentvestors is to purchase a family home for their later years, locking in their future while staying in the city to enjoy the benefits of bars, cafes and restaurants, and reduce commute times.

The most critical aspect of a rentvesting strategy is to execute it as a long-term play. Capital gains that make the initial investment worthwhile can take years to realise. The key advantage, of course, is receiving rent to help meet the mortgage obligations.

Yet a poor investment decision will undo all the potential gains of rentvesting. Here are some tips to get the strategy right.

  1. Think long-term: Capital gain from property usually takes time, so make sure it matches up with your other personal and financial goals. Accept that it will take a calculated risk to enhance your wealth. Don’t be intimidated, just do your research.
  2. Suburb selection: The best capital gain comes from suburbs that are on the up-and-up. Spend time seeking out the best potential areas where you believe prices will rise fastest. That way, you give your investment the best chance to deliver strong fiscal growth.
  3. Property choice: Your purchase must be attractive to a potential tenants. The property will crush your cash-flow if it remains vacant. Ask local real estate agents for advice on the types of homes in the area that are popular with renters before making a decision to buy.
  4. Local services: Ensure your property offers easy access to transport, shops, schools and other amenities. Poor local transport is a real turn-off with potential tenants.
  5. Financial benefits: A tenant’s rent will help offset, or even pay in total, the mortgage obligations of your property. A good accountant will also maximise the tax benefits, such as negative gearing.

Some things to watch out for:

  1. Mortgage payments: The rent may not cover the entirety of the mortgage repayments. Do your sums before making a purchase so you’re confident you can cover any shortfall without it affecting your lifestyle.
  2. Loan costs: Banks tend to charge a higher interest rate on an investment loan, so shop around for the best deal. A mortgage broker can offer a range of products and will structure a loan to best suit your situation.
  3. Agent fees: The best way to manage your property is through a property manager. There are fees associated with this, but they will also advise you on the appropriate rent to charge, negotiate with tenants and ensure the property is well maintained. Not using a property manager may impact on your ability to insure your property. They can also respond quickly to any issue and will undertake regular inspections to ensure the property remains in good order.
  4. Upkeep costs: Everything breaks eventually. If you buy an apartment, you’ll be up for predetermined strata fees For a house, maintenance costs can be higher still, especially if you decide to send a gardening crew around every fortnight. Seek advice from a real estate agent on potential costs and how you can minimise them.
  • This article is of a general nature. Readers should seek professional advice.