The rise of the ‘rentvestor’
There’s still talk of property being ‘unaffordable’, and frankly, it’s a debate I’ve been hearing since it also looked unaffordable back when I was in my twenties. I recall being pressured into buying as soon as I could, since it was not going to be long before no one could afford to buy their own home. That was 1980, and fast forward to today and the rate of home ownership has not really changed to the degree that was expected. Between then and now, housing has come into, and gone out of, affordability more times than I can count. And no doubt this will continue for years to come. Let’s also not forget that the question of affordability is highly subjective – Sydney may be largely unaffordable now (depending upon where you want to live) but Adelaide and Brisbane remain highly affordable in much of the city.
I speak with a lot of young people and they seem less worried about this apparent lack of affordability than those of us who are already way down the path of home ownership. This is not because they don’t want to buy a home of their own, although for many this is the case with careers, travel and lifestyle becoming more and more a priority (not necessarily in that order). Actually owning a home seems further down their list than it ever was for us.
However, there is an emerging new category of property buyers, affectionately known as ‘rentvestors. These are people who understand that getting on the property ladder does not necessarily mean buying an owner-occupied property. They are often people who want to live in areas which are within their price range but have other reasons for wishing to live there. And very often they are people who build large and substantial portfolios without ever needing to actually live in any of their properties. If you have considered becoming a rentvestor, here are a few considerations to make before taking the plunge;
- Are you comfortable living in a property where you may have to move if the owner wants it back? While it is possible to obtain long leases, there is no surety in renting. At any time, the owner may sell to someone who no longer wishes to rent out the property, or they may want to move in themselves. Tenure cannot be assured when you are a renter.
- Are you prepared for the fact that the landlord can, and most probably will, increase the rent for the next consecutive lease period, particularly if the area suddenly comes under increased demand? Under these circumstances, you may find yourself on the move before you are ready to do so.
- Are you OK living in a property where you will be restricted as to what you can do with it? You may not be able to hang pictures or change the curtains, and needed renovations may not occur. Some landlords are often prepared for a tenant to carry out improvements at either a shared cost or their own cost, but often, it makes no sense to spend money on a property which you may not be able to stay in for the long term.
- When it comes to where you need to live, is it cheaper to rent, or to pay a mortgage? Establishing if you need to live in an area includes how far the commute to work will be (and how much it will cost), where your social networks live, schools for your children and other lifestyle needs. In some areas rental yields are very low in relation to purchase prices, sometimes lower than 3%, and this would mean it is cheaper to rent. In others, rental yields can be 5 and 6% and in these cases it may be more beneficial to purchase.
- Are you committed to still building an investment portfolio of your own, be it through property or through other forms of investment? Simply renting because you don’t want to save the deposit or commit to an investment plan isn’t the same as committing to being a rentvestor. Rentvestors have firm and committed plans and end up with a solid net worth. Renting long-term without putting in place a plan for the future often results in reaching retirement age ill- prepared to be self-supported.
Bear in mind that an owner-occupied home is capital gains tax free and owning an investment property is not. If you want to buy in an area that has not had substantial growth yet (usually affordable areas where the population is growing and infrastructure projects are in abundance) you may well buy a property which grows really well and you won’t have to pay CGT on that gain.
Alternatively, the area that you wish to live in may already have its greatest period of growth behind it (usually those well-established areas with high prices and low rental yields) and so that capital gains tax exemption doesn’t have such a big upside or value to you.
If you would like to start a property portfolio with properties that you don’t live in, you can still preserve the first home owner grant for a future time. The rules around that grant are simply that you don’t own and occupy a property – you can own as many investment properties as you like and still keep the grant for some time in the future. Building a portfolio of properties in this way, as long as you also put in place a savings plan alongside this strategy, can be a great way to boost your savings toward a deposit – you can have a tenant in place paying your mortgage while you save toward a future own home. After a few years, you will have not only your own savings, but also any growth in the property, which can then be used toward any home of your own you might like to buy.