One of the top life hacks that can help you get onto the property investment ladder is to draw down on the equity built up in your home. Then you can borrow what you need to buy a home and land package and build to rent out. But what if you don't own a home or have a mortgage already?
Soaring property prices – particularly in Sydney, Melbourne, and Brisbane – have locked many would-be buyers out of the market. But it's a little-known fact that you may be able to kick start a property portfolio without owning.
This intelligent investment tactic is what's commonly known as ‘rentvesting’.
What is rentvesting, and how can it help me?
Rentvesting can be a realistic alternative for first-time buyers and budding property investors. It means opting to buy or build an investment property in a more affordable suburb, usually in a growth area on the outskirts of a major city or regional area. You then get tenants in, and their rental payments help pay your mortgage. That leaves you free to rent or stay with Mum and Dad in an area you love but can't (yet) afford to buy in.
"You'll often hear the phrase 'Rent money is dead money," says John Sheehan, General Manager of Invest by Metricon, "But that's not necessarily the case. Rentvesting means you're paying off a home loan while opening up your investment opportunities, and you may not need to sacrifice your current lifestyle."
That's particularly appealing to younger buyers. "Rentvesting could mean breaking into the property market sooner than if you bought-to-live," John says.
Why reinvest now?
The property market is historically strong, and interest rates are low, which makes rentvesting appealing.
"We know that for many buyers, median house prices $1 million-plus aren't achievable," John says. "But many of the same people don't want to miss out on the property boom happening around them. So, it's worth considering rentvesting."
You need to do your homework to make rentvesting work for you, John adds. "When choosing where to buy to build, look at vacancy rates. How likely are you to get a tenant in the home you're interested in buying? Also, look at rental yield – the income generated by your property annually as a percentage of its value, minus costs."
And while it's not quite the same as owner-occupying, you still want to build an appealing property in a growth area that's close to parks, schools, shopping strips, transport options and good road connections.
If you take a look at CoreLogic's rental yield report for the first quarter of 2021, you'll see some of Australia's rental hotspots. And at Metricon, we're pleased to see some of the areas we build in are doing well. In Victoria, areas like Berwick and Werribee are great options in Melbourne, and there's some excellent growth regionally in places like Morwell and Mooroopna. Looking at CoreLogic's 2020 wrap, Logan and [insert another QLD area] are good in Queensland, as is Wagga Wagga in NSW.
South Australia has some strong rental returns, too, with Andrews Farm, Davoren Park, Munno Para, and Salisbury Park offering growing rental yields, up almost five per cent in the first quarter.
What you need to know about rentvesting
As a rentvestor, you're the owner and landlord. "If this option is going to work for you, your tenant will hopefully cover the majority of your mortgage, but you will remain responsible for additional costs like repairs, council rates, landlord insurance and body corporate fees," John says. "You'll need to make sure you have enough saved to cover both the expected and unexpected bills."
You also need to think about who will manage the rental agreement between you and your tenants "If that's not you, then hiring a property manager costs money too," John adds.
Some of these expenses could be tax-deductible. You might also be able to claim interest payments on your investment property as a tax deduction, so it pays to get financial and tax advice before you begin.
Many rentvestors eventually sell their investment property to help purchase their first live-in home. When you do, you might be liable for capital gains tax, so keep that in mind. If it all stacks up, rentvesting might be the perfect option for you.
Make sure you seek financial advice
While we've tried to be as helpful as possible, this article should not be considered professional financial advice. It contains general information only, and you should seek out independent, professional advice on your personal situation before making any financial decisions.
If your financial adviser thinks rentvesting is a good idea, talk to one of Invest by Metricon's friendly experts today.
If you feel ready to start your property investment journey, learn more about Invest by Metricon today. Invest by Metricon offers an end-to-end process that allows you to obtain a rent-ready, premium home in one of Australia’s leading estates, simplifying your investment journey. With new build investment opportunities across Victoria and Queensland, you're sure to find something that suits your investment strategy, no matter where you live.
