What is ‘rentvesting’ — and should your kids be considering it?
Buying your own home was once considered a key pillar of the ‘Australian Dream’. But with housing affordability now reaching critical levels, it may feel out of reach for many who’ve yet to get a foot on the property ladder.
With the property price boom expected to continue, young Australians now have an alternative solution — rentvesting. The term has no doubt become a buzzword over the past few years, but rentvesting isn’t a guaranteed success or the answer for everyone. There’s no denying the demand for an alternative solution, with the average Gold Coaster taking almost seven years to save the deposit for their first home.
The overarching idea behind rentvesting is treating your first property purchase as an investment and residing at another residence while paying rent there. Instead of purchasing a property of the size and in the location they want to live, rentvesting allows people to live where they want to, without needing to fulfil the cost demands of buying property there.
An example would be a young professional who rents out a one-bedroom apartment close to the beach and the café lifestyle and purchases a three-bedroom home in an outer Gold Coast suburb.
The property purchased is then rented out to tenants, to cover rental payments, and later sold for potential capital gains. This strategy is all about not sacrificing the lifestyle you want, while still building a property portfolio. Additionally, with an investment, expenses such as repairs and depreciation on the property can be claimed as tax deductions.
Rentvesting has many clear benefits, including being more flexible in terms of your own living arrangements and helping people to enter the property market sooner. However, it doesn’t mean you’re free from the age-old proverb of ‘rent money is dead money’, and it’s not a one-size-fits-all solution. While it may provide a band-aid effect for a number of first-home buyers, experts warn this may create a more significant affordability issue for the next generation to deal with.
In 2014, only 20 per cent of investors were also renting at the same time, according to a Mortgage Choice survey. More recent data suggests that figure now sits at well over 30 per cent.
Young Gold Coast residents are looking to live in beachside locations, with innovative design and layouts, close to cafes and dining precincts, which may not be in their price range, so rentvesting allows them to continue renting a place in the location that they love without having to move further away or putting themselves under the financial stress of a huge mortgage.
With this strategy, deposit savings become more important. So using the deposit they have saved, they can invest in more affordable locations and still be property owners. If values are raising faster than rents, it is most likely cheaper to rent than buy the equivalent property. However, one thing to consider is rentvestors would not be eligible for the first homebuyers grant on their investment property.
We are seeing strong rental and purchaser demand from a younger demographic looking to live in the village beachside suburbs of Palm Beach, Burleigh Heads. Mermaid Beach, and Kirra. We see this trend continuing with more and more retailers wanting to give residents a great choice of dining and café options in these vibrant beachside villages.
The decision about whether to live in your first home or rentvest is entirely an individual one, and there are pros and cons to both. Whether or not the increased prevalence of rentvestors will worsen the housing affordability crisis over time is yet to be seen, but in the meantime it offers many young people a chance to enter an otherwise elusive and moving market.
If you would like to read through my case study, you can call me or email me and I will send it by email to you.
Contact David via email at David.Higgins@colliers.com or phone +61 7 7558 0270.