"Rentvesting" is where you purchase a rental property as an investment while renting another property in which to live.
According to many experts, rentvesting is a great for first-home buyers to enter the property market. It's a smart approach to property acquisition that's giving potential first home buyers the opportunity to buy sooner rather than later.
In Sydney in particular, house prices are growing faster than first home buyers can save a deposit. Saving $25,000 is a big commitment, and hard work, and by the time you have $25k saved, house prices are likely to have jumped by double that.
If you buy an investment property first, and rent where you want to live then you can enter the property market and have an asset that is growing in value, and have the mortgage paid off by the tenant. The equity you are gaining in the investment property can then be used to buy additional investment properties or to get you into your dream home. This works well if you purchase in high-growth areas that have high rental demand.
If you are a first home buyer, this may mean you will not be eligible for First Home Buyers Assistance grant. However, if you buy a good quality investment property in a growth area, in the 6 months you would have to live in your own first home to qualify for the $10,000 your investment property may have increased in value by many more times that!
What are the Pros and cons of Rentvesting?
• Enter the property market sooner, with a smaller deposit, and have equity growth start earlier.
• Live where you want to live, and not just where you can afford to buy
• Build Investments to generate wealth and increase your property portfolio or to buy your dream home
• Tax benefits. There are tax benefits on depreciable items in your investment property and you may be able to claim mortgage interest as a deduction*
• Choose where to invest to make sure you get the best rate of return and capital growth.
• You will still be living as a tenant yourself
• You won’t be eligible for the First Home Buyers Assistance grant
So how does this stack up financially?*
Let's first look at prices of new homes in 2 different locations - one in South Western Sydney, and one near Maitland in NSW.
• New 4-bedroom homes in Oran Park average around $840,000 on a 485sqm lot. Oran Park is about 1h 30mins from Sydney CBD.
• New 4-bedroom homes in Thornton average around $585,000 on a 630sqm lot. Thornton is 25 minutes from Newcastle, and 1h 55mins to Sydney.
Oran Park 4-bedroom home $840,000
Deposit Required $84,000
Monthly mortgage repayment (on 90% loan at 3.99%) $3,605
Median Monthly Rent (avg $580pw) $2,514
Thornton (Maitland) Area 4-bedroom Home $585,000
Deposit Required - $58,500
Monthly mortgage repayment (on 90% loan at 3.99%) - $2,511
Median Monthly Rent (avg $470pw) - $2,036
If you were to purchase a home to live in at Oran Park, it would cost you $840,000. As well as needing around $30,000 more deposit, you would also need to pay over $3,600 per month for your mortgage in Oran Park using the above figures as a guide. Your total outgoings on your home would be $3,605 per month.
So what would happen if you bought an investment property in Thornton, and put tenants in it, and then you rented and lived in Oran Park?
PAY Monthly mortgage (Thornton) -$2,511
PAY Monthly Rent Oran Park -$2,514
RECEIVE Monthly Income from Investment (Thornton) $2,036
TOTAL OUTGOINGS -$2,989
So even after paying rent in Oran Park, and a mortgage in Thornton, with your additional income from your tenants you could be better off by over $600 per month! In addition, the property you are buying will increase in value - we've looked at historical trends, so talk to us about the amazing growth in Thornton over recent times!
Talk to the team at Oliver Myers about a quality new home in a growth location that would be ideal for Rentvesting. As well as the example used here, we do have other quality homes for under $500,000 too! Unbelievable but true!
*Note:This example is using general information based on publicised mortgage calculators and rental prices as at 20/3/2018. Every person's financial situation is different, and you will have to talk to your financial advisors to look at your individual circumstance.