Rentvesting

As a representative of Gen Y, I will be the first to put my hand up to admit that I am incredibly demanding and I want everything.

In a society where I can almost write a sentence purely with acronyms, the English language is quite frankly at risk, so is expecting people to understand personal finance asking too much?

So does it pay to be educated if you want a balance between lifestyle and investing? Have you heard about Rentvesting?

Most people grew up thinking that rent money is dead money and that you’re better off saving to buy your own home rather than fulfil someone else’s Australian dream. However, as previous decades have shown property prices have increased significantly, on average by 7% per annum over the last 30 years according to the Reserve Bank of Australia. No wonder many first home buyers cannot get into the market, let alone buy a property that they’d actually want to live in. After all you can’t possibly expect to buy your dream home first time round (but we all know that’s what we expect).

So what is Rentvesting and why does it deserve a place in our already saturated repertoire of hip vocab?

Rentvesting is when you rent somewhere to live and buy an investment property in a different area. This can work well if the rents in the areas you want to live in are low = cheap rent. In the meantime, you can consider investing in area where property prices are slightly more affordable and have equally good growth prospects. Take me as an example. Here’s my list of demands:

  • I want to live close to the city so I minimise my travel time when I’m working long hours
  • I want to be close to all the trendy brunch cafés serving overpriced smashed avocado because YOLO
  • Let’s face it, I don’t want to pay more than $25 for an Uber ride home on a Saturday morning
  • Everyone else is doing it so FOMO factor, it’s never a good feeling.

So what does this mean in terms of numbers and why you should take notice?

As a renter, I currently pay $530 per week in rent which is equivalent to $27,560 per year. However as returns in Melbourne are at historical lows, the property is probably worth $1 million.

As a buyer, if I were to purchase the exact same property, I could consider the following;

  • A loan of $900,000 and put in a 10% deposit.
  • Assume a rate of 4.1%
  • Repayments to cover the interest are $710 per week, $180 more per week and I haven’t even started paying the principal down. This is equivalent to $9,360 per annum which could also mean a free holiday to Europe each year.

But wait, in this current lending environment, we haven’t deciphered our way through credit policy to understand the endless list of hurdles and limitations:

  • This assumes I have magically saved a deposit of $160,000 in my limited working life; $100,000 as the deposit plus $60,000 to cover purchasing costs
  • My income alone cannot service a $900k home loan and I don’t want to delay investing until I have a partner
  • The bank won’t even lend me anywhere near the $900k on an entry level salary
  • I really don’t want to take on such a big mortgage straight off the bat

The next best alternative is to look at lower purchase prices either further out from the city or in interstate markets. This means that you can turn each of the hurdles into opportunities and get your foot in the door.

I invested in the following;

  • A house 5 kilometres from Brisbane CBD for $670,000
  • Returns $580 per week in rent.
  • This costs me approximately $200 a week out of pocket so instead of spending $180 per week in unnecessary interest repayments
  • I can rent the same property to meet my lifestyle needs and instead apportion my cash flow to another asset that will hopefully perform for me in the medium to long term.

So where to from here and how do you get started?

Start with EDUCATION! Hit me up for a chat, to talk to me about cash flows, savings, borrowing capacity to help you define your strategy because if you don’t, somebody else will and then FOMO will come and get you.

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