Rentvesting – renting a property to live in while owning one or more investment properties – is becoming an increasingly popular way for Australians to get a foot on the property ladder.
According to Property Investment Professionals of Australia (PIPA)1, 36% of first homebuyers opted to invest in property and continue to rent instead of buying a home to live in in 2018.
But while the prospect of buying where you can afford and renting where you want to live sounds enticing, there are a few things to consider before embarking on a rentvesting strategy.
Here we outline our top five.
Getting a loan is harder than it was
While the tougher restrictions APRA placed on interest-only loans have recently been lifted, many lenders have upped interest rates on interest-only loans and borrowers also need to meet more stringent income and expenditure tests.
You will have the best chance of qualifying for a loan if you have a sufficient deposit and evidence of genuine savings to show you can manage your finances. Borrowing less than 80% of the property’s value also helps to avoid Lenders Mortgage Insurance (LMI), which can add to the cost of your purchase.
Lenders will also check your credit history and require you to show that you have a strong income and stable employment before approving a loan, so get your ducks in a row before you apply.
You won’t qualify for government assistance
If you are a first homebuyer, you may qualify for a stamp duty exemption or grant if you buy a first home to live in.
The First Home Owner Grant varies by state. In both New South Wales and Victoria, for example, first homebuyers are entitled to $10,000 when purchasing a new home under $750,000. First homebuyers can also access a full or partial reduction in transfer duty (formerly known as stamp duty) in some states.
If you are considering rentvesting as a strategy, it is important to note that you will not qualify for any of these free kicks, which could help with the costs of your purchase.
It’s best viewed as a long-term strategy
Many rentvestors consider the strategy a stepping stone to realising other plans, such as buying a family home to live in. Yet while data1 shows there are signs that Australia’s property market is now nearing a bottom, with auction clearance rates improving, there is little evidence that property markets will return to boom times any time soon, so don’t bank on fast capital growth.
Investing in property is best viewed as a long-term investment strategy of seven to 10 years. So, when searching for your perfect “rentvestment”, ensure you are taking a long view, and factor in any future plans such as having children or living on one income when deciding on what you can afford.
Purchasing costs can stack up
Buying property comes with a range of costs including transfer duty, legal fees, building and pest inspections, which all add to your total bill.
Investment properties can also bring additional costs such as the need for an accountant to help maximise tax benefits, landlord’s insurance to protect your asset and a professional property manager to keep things running smoothly. It’s therefore important to do the maths to be absolutely sure you can take on the responsibilities.
Being a landlord and a tenant can be a hassle
Long-term renting can bring many benefits, such as the freedom to live where you like and move when you choose. There are, however, high costs – an average of $530 per week in Sydney, $465 in Canberra and $410 in Melbourne for an apartment3 and renters can be obliged to move with little warning.
Being a landlord also comes with its own set of issues – you may get a difficult tenant, for example, or need to spend more time than you’d like managing the property.
So, while rentvesting can be a great way to get a foot on the property ladder, consider all factors before making the leap.
For more information or assistance with your finances please call us on 08 8451 1500
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