With housing values rising substantially faster than household incomes, raising a deposit has become more and more challenging for many Sydneysiders, especially first home buyers and investors. On the Northern Beaches, the median house reached a high in October 2023 of over $3m, up $594,000 in a year, rising $286 an hour based on a 40-hour working week!
Existing homeowners looking to upgrade, downsize or move home may be less impacted as they have had the benefit of equity that has accrued as housing values have surged. So, how do you get a foot in the property market when the barriers to entry are so high?
You may have heard the term ‘rentvesting’ bantered around. Rentvesting is the smart answer to growing wealth and living where you want to live. Let’s take a look at how it works.
Basically, rentvesting is the approach of renting where you want to live and work while investing in property in other, more affordable areas that are poised for substantial growth. Whilst rentvesting isn’t a new concept, it’s certainly becoming more popular as property prices in Sydney continue to increase. It can be the perfect way to get started in the property market and in fact more and more savvy property investors are opting to rentvest as a way of life as it presents such an incredible opportunity to grow their wealth whilst not compromising on their lifestyle.
Benefits of rentvesting
- Enter the property market sooner:
- Rentvesting allows you to break into the property market sooner with a smaller deposit, as opposed to waiting several years until you can afford to invest. You can target more affordable regions that are at the beginning of their growth cycle and therefore more likely to yield high capital growth.
- Live the lifestyle you want:
- If rental prices allow, you can live in your dream home now and not have to compromise on location or features. Also, because you are renting, you can easily upgrade or downsize to a different home if ever your financial situation changes without having to worry about stamp duty or other legal expenses.
- Build wealth:
- Rentvesting allows you to start building your investment property portfolio, which can be used to generate wealth and security for yourself and your family’s future.
- Tax benefits:
- Your own home is not tax-deductible, and so rentvesting may provide tax benefits that you wouldn’t otherwise get which gives you the chance to build your portfolio faster. You may also be able to claim depreciation on the building, plus in some instances any new fixtures and fittings added to the property.
- Cost savings:
- As a renter, your landlord is responsible for the maintenance, upkeep and safety of the property, as well as covering costs such as council and some utility services (outside of usage), and any potential body corporate fees, etc. It’s worth noting that as a potential rentvesting landlord, you too will have to cover the cost of these items, but in many cases, they are tax deductible.
Of course, there are some downsides to rentvesting, most notably if your landlord decides to sell, you may need to make the property you are renting available for open inspections or even vacate it which means there is less security in your primary residence.
Research is the key to a successful rentvesting strategy
Where you want to live and the best place to buy an investment property are rarely the same, so rentvesting allows you to be strategic when it comes to choosing an investment. This means you can make investments that return the greatest capital gains and get you on the road to building a successful long-term property portfolio.
Take these recent examples of investing in other states that are poised for substantial growth as well as being much more affordable than Sydney, which is currently at the height of its growth cycle. In comparing these examples, bear in mind the current average rental yield for Sydney houses is 2.6 per cent and units 3.9 per cent and the average Sydney median house property price is now $1.4M.
Case studies
Suburb/State: Adelaide, SA
Property type: 2 bed/2 bath/1 car townhouse
Purchased in August 2020: $475,000
Capital growth over 3 years: 33% ($155,000)
Rental yield: 9.5%
Suburb/State: Brisbane, QLD
Property type: 4 bed/2.5 bath/2 car townhouse
Purchased in September 2022: $720,000
Capital growth (over 12 months): 14% ($100,000)
Rental yield: 6.0%