PropertyLadder

Rentvesting: Getting a foot on the ladder

“The worst thing about home hunting? I see lots of places I can afford, and lots that I would want to live in… but never both together.”

Want to get your foot in the Australian housing market door?

Opportunities may be around the corner, especially if you’re prepared to look at an inner city apartment in Melbourne, Brisbane, or parts of Sydney with lots (and lots) of new apartments expected to be completed over the next couple of years.

But what if you don’t want to live in one of those areas? In fact, what if you wouldn’t want to live anywhere you can afford to buy?

Perhaps you should think about “rentvesting”: instead of buying the property you want to live in, you rent a home and then invest the leftover money elsewhere.

Why would that work? Because rental yields are usually lower that the cost of servicing a mortgage. (That’s why negative gearing works.)

Take Sydney for example. The average weekly rent for houses in Sydney is $530, or $2,120 per month. The median house price is $996,000 so assuming a 20% deposit and a 25 year mortgage of $796,000 at 4.5%, monthly repayments would be around $4,424.

So if you rent you have an extra $2,300 per month to invest.

Apartment rental yields tend to be higher so the median figures generate $800 per month to invest by renting an apartment.

But rent is “dead money”, right?

Not necessarily. Whether or not you would do better rentvesting or with a traditional home mortgage will of course depend on lots of factors specific to your situation but on average, the Reserve Bank of Australia thinks it comes out about even. In 2014 the RBA published a “Research Discussion Paper” analysing 60 years of Australian housing data and concluding that “we find that if real house prices grow at their historical average pace, then owning a home is about as expensive as renting.”

So what are the pros and cons of Rentvesting?

The Pros

  • You could break into the property market sooner with a smaller deposit.
  • You may be able to live in a better home than you can afford to buy.
  • You could start building your investment property portfolio, now.
  • You could easily upgrade or downgrade or move around (even travel the world), with no stamp duty expenses or legal costs.
  • You could claim interest payments and maintenance costs on your investment property as a tax deduction.
  • It would allow you to be ruthlessly objective when it comes to choosing an investment.

The Cons

  • You may be required to move out whether you want to or not.
  • Want to freshen up a room with a coat of paint? Hang some pictures? Replace the carpets? It wouldn’t be sensible to spend too much and you can’t make any improvements without permission from the landlord.
  • You would pay capital gains tax on your profit when you sell your investment property.
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