As housing affordability continues to blow out and first home buyers continue to struggle to break into the housing market, a key but often ignored property strategy is coming into its own.
Despite resurgent optimism for first-home buyers coming into the new year courtesy of the Morrison Government’s Load Deposit Scheme, a sobering reminder for rookie property intenders came this week in the latest figures from the Australian Bureau of Statistics.
They revealed the number of loan commitments to owner occupier first home buyers fell 0.9 per cent in November following a 0.4 per cent fall in October – the first back-to-back fall since January 2019.
That news comes on the back of CoreLogic’s Perceptions of Housing Affordability which found that 83 per cent of non-property owners surveyed are worried about being able to afford their own home.
But don’t despair, there is a way you can break into the housing market without breaking the bank and putting your financial future at risk – rentvesting.
Rentvesting is when property buyers purchase a property in an area they can afford, and then rent it out, but continue to lease themselves in a location they prefer to live in.
Rentvesting gives first home buyers the chance to gain an initial foothold on the property ladder. It also means they don’t have to necessarily sacrifice their lifestyle, or face an extended commute, by remaining in an area more favourable for them to live in.
“It’s a good idea and a very attractive option for a lot of younger people,” said REA Group Chief Economist Nerida Conisbee said.
“Given housing affordability issues it’s something young people are looking at more and more. A lot of the more premium areas are out of reach for many buyers but this is a great way to get their foot in the door, in terms of property.”
Ms Conisbee however warned that rentvesting should not be seen as a flipping-type alternative to property ownership. She said those who took on rentvesting as a viable option should be looking to keep their property for “at least two years, ideally five or more”.
“Investing should always be a long term approach,” she said.
“As the property increases in value, you can take the profits and then move on to your next step.”
Rentvesting was how lawyer and property educator Dominique Grubisa of the DG Institute broke into property.
“It’s something that I often suggest to people,” she said.
“In many ways it can be one of the smartest things you can do. You have created an asset for yourself and that is very important but you are also learning about what it is to invest in property. But you need to do your research. Find the area you want to buy in and become an area expert. There’s nothing like pounding the pavement.”
George Nikos, the founder of Urbane Property in Sydney’s inner west has been in the real estate business for 30 years and has witnessed buyers looking for that edge in a competitive market.
“Rentvesting is a great idea,” he said
“We are seeing more and more people coming through our doors interested in the idea and interested in executing it. You have to been savvy about it and you need to do your research. You don’t way to make a purchase that isn’t going to work for you, especially financially, whether you are living in it or not But it is definitely a way of getting into the market and getting ahead.”
Aim for growth
Buyers agent Leon Jacques from Cohen Handler said rentvestors need to be mindful of buying in a growth area.
“You need to target those good growth areas,” he said.
“Rent where you want to live and buy where there is a good investment.
A good investment has traditionally been a property that doubles in value every seven to 10 years.
“Whether that is sustainable in the current market, time will tell,” Mr Jacques said.
So what is a good growth area?
“Once you have your deposit or close to it, you need to start doing your research on where to buy,” Mr Jacques said.
“It can be worthwhile getting advice from different professionals, including a buyers agent or a property strategist.
“It’s crucial to look at the historical capital growth of certain areas and understand what the drivers of that growth has been.”
According to Mr Jacques, those drivers of capital growth include:
- A lack of land
- Locations near the CBD/jobs
- Areas close to transport, schools, hospitals and amenities
- Areas nearby to beaches or the harbour
- Population growth
- The right economic environment
“What could potentially affect those drivers and the capital growth of areas that have historically been strong could be a rezoning of land to higher density,” Mr Jacques said.
“Areas with too much land, areas of over supply and new estates that have no history of growth are areas I would also avoid. Also smaller regional centres, suburbs of high crime, flood zones and remote areas.”
Ms Conisbee suggested the area between the Gold Coast and Byron Bay could be an emerging area, where prices are starting to move. She stressed buyers need to do their research before committing.
The three keys to rentvesting
As with owner-occupier and investor purchases, Mr Jacques has three variables that can apply to rentvesting
“We don’t want to play around with a good location,” Mr Jacques said.
“I would rather buy an apartment in Bondi than a house in a mining town. The biggest tip is you have to buy in the right location. Have a look at the history. Has it had strong historical growth? Has it outperformed averages?”
The banks set the upper end of what you can afford. But most finance professionals recommend you don’t spend more than 30 per cent of your income on your mortgage.
What can you buy within that budget in the right area?
Avoid the sugar hit
A sugar hit isn’t great for anyone in the long term. What goes up, must come down, right?
“Don’t look for suburbs with the sugar hit,” Mr Jacques said.
A sugar hit doesn’t last. A key example of this is in mining towns. Price growth around Badgerys Creek Creek in Sydney, the location of the city’s controversial second airport is another example
“To get it right you have to really understand the market.
“Go to as many opens and auctions as you can, so you really understand the values,” Mr Jacques said.
“Once you can are consistently close to picking the prices properties go for, you know you understand the market. Sometimes it will go way over the agent’s guide and sometimes way under. But once you are picking the prices you know it’s the right time to make a move.
“And always be guided by your own knowledge, not the agent’s.”
Originally published by James MacSmith in The Daily Telegraph HERE.