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The great Australian dream of owning a home has been given a boost in recent weeks with interest rates at record lows and the Government announcing a raft of measures to assist first home buyers. Despite this, buying a home is still a huge task for many aspirational homeowners. Quite often coming up with the deposit to purchase an inner-city property, and the cash flow to service a large mortgage is certainly not easy.
Rentvesting is a term that is gaining a lot of traction in the media and the world of finance. But before we launch into the specifics, what exactly is rentvesting?
Rentvesting involves the purchase of an investment property which you lease (rent) to tenants in an area that you can afford, and then you rent another property in a suburb where you want to live, that offers the lifestyle and location you desire.
Even with the recent property downturn, prices in Melbourne and Sydney are still expensive, pricing many younger people out of the market, especially for properties close to the city. Rentvesting could enable you to enter the property market with greater ease and speed.
For example, purchasing a million-dollar home in Melbourne would require a sizeable deposit ($200,000 or 20%), and result in an $800,000 mortgage. Repayments on this mortgage alone would be over $1,000 per week. However, believe it or not, you can purchase a home on a decent plot of land for much less than a million dollars in Melbourne. The catch is that you need to search beyond 30kms of the city centre. Although the idea of living so far from the hustle and bustle may not appeal to many young people, it is in these locations, outside the mortgage belt, where many people find an affordable home to call their own.
Here is where rentvesting comes into play. If this young person still really wants to live in inner-Melbourne but realises they can’t afford it, purchasing a property that is further out, or even in a regional or interstate location and then renting this property could enable them to do so. This way, the mortgage is getting paid while they rent an alternative property closer to the city centre.
The benefits of this strategy are that you get to live where you want without the expensive mortgage, but you have also entered the property market.
Although the traditional belief that “rent money is dead money” is a sticking point for some people, rentvesting allows you to use renting as part of an effective overall investment strategy.
Let’s consider this; what if you were paying rent and a mortgage, on a more affordable investment property that was tenanted, and your cash flow position was still better than buying and paying a huge mortgage on your dream home? If that was the case, any surplus funds could be invested in an investment portfolio and within a decade you could see capital growth across both your investment property and an investment portfolio. This is how over time you would be in a position to buy that dream home.
In short, should you rent or buy? Unfortunately, there’s no one size fits all answer to this question. Instead, the right approach for you will depend on your personal circumstances. Before you choose to buy a home or rent and invest, make sure you can afford both strategies. Just because an investment property is cheaper than your dream home doesn’t necessarily mean that you can afford it, and just because renting feels like throwing away money doesn’t automatically mean you should mortgage yourself to the hilt.
Before deciding on either approach, you would benefit greatly by seeking out expert advice from a financial adviser to uncover the pros and cons to both buying and rentvesting based on your own financial circumstances.
Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email email@example.com or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.