Rentvesting is not a new or complicated concept, but something that isn’t understood by most. It basically means buying a property (typically your first) as an investment rather than as somewhere to live. This allows you to broaden your investment criteria, letting you get into the market sooner by purchasing an affordable property and using the rental income generated to help pay the mortgage while you continue to live in the location, or property type you want. So there really is little out-of-pocket expense, and little impact on quality of lifestyle
This works extremely well in the current property climate, as people cannot save as quickly as capital growth. So you can buy at a lower entry point, typically in outer ring suburbs, that have strong rental yield, which covers most if not all, of the mortgage with todays low interest rates. Allowing the rentvestor to take advantage of the strong capital growth.
And we haven’t even mentioned the tax benefits! Very simply, repayments on a principal place of residence (PPOR) cannot be deducted. On the other hand, interest repayments from an investment property are fully tax deductible, so you can end up making some great savings when tax time comes.
A great example and demographic we have noticed here on the Northern Beaches is young families.
After having their first or second child they are soon outgrowing that 2 bed unit they purchased a few years ago. They want something with some lawn, another room, or just some space to grow in to. But they don’t want to loose their beachside lifestyle. The problem is, property on the beaches has been skyrocketing and for most is not affordable to upgrade to a house or bigger unit – let alone one in a similar beachside location to the 2 bed apartment they purchased just a few years ago.
So a great option is to rent the house or bigger apartment where you want to live, and rent your beachside 2 bed apartment.
I’ll use the example of our clients Dane and Elise:
Dane and Elise bought a 2 bed 1bath unit together in Dee Why in 2012 for $410k. They were paying a principal and interest loan of $340k, which was $1,988.00 P/M repayment.
They have since got married and had their first child Angus. Their 2 bed unit near the beach is getting a little cramped, and with property prices continually rising purchasing a bigger property on one income just wasn’t possible. And they didn’t want to move away from the lovely beachside suburb of Dee Why.
So Dane and Elise decided rentvesting would be a better option. They refinanced their property with an interest only loan of $310k at 4.3% bringing monthly payments down to $1,110.00
They then came to us at Property North Agency to lease out their 2 bedroom unit for them while they decided to rent a 3 bed town house just down the road for $670pw.
Property North Agency managed to lease their existing property out for $540pw within the first 7 days.
So lets have a quick look at the financial breakdown and lifestyle position compared to before.
They were living where they wanted, but in an overcrowded 2 bed unit.
Holding cost was $1,988.00 P/M
They are in the same street, but now have a large 3 bed town house with double car garage and lawn for Angus to play in.
Interest only home loan cost $1,110.00 P/M
Rental Income of $2,340.00 P/M
Town House Rent $2,903.00 P/M
Cost: $1,673.00 P/M
That’s a difference of just $315.00 P/M (or just $72 per week) to live in the same area, in a much bigger property to suit their growing family, while they still benefit from the capital growth on their original investment.
We are seeing the same practice with some savvy kids of Gen Y.
Instead of complaining about how unaffordable property is, they are purchasing lower end property in outer circle suburbs while living in a share house arrangement themselves. This allows them to get a foot in the door, benefit from the capital gains on their investment property with little effect on their lifestyle as typically, the rental yields on these entry-level properties, cover most of not all the mortgage repayments with the current interest rates.
The other demographic we see are those that rentvest to build wealth and a property portfolio. Instead of buying a family home and paying off a big mortgage, they go out and buy two, three or even four investment properties at interest only and hold these properties for their capital growth.
Check out the video by Blue Wealth below for a great explanation of using rentvesting to build a property portfolio.
Where we come into it, is that we can guide and manage your property. Ensuring you get the best tenants, the best rental return and security of having your biggest investment managed professionally.
For you free rental appraisal or to discuss any property management needs you may have, please don’t hesitate to call or email Ben or Yasemin.
Ben: 0412 884 325
Yasemin: 0402 839 275
We are Northern Beaches boutique agency that specializes in Property Management. We understand your individual needs and can tailor our services to suite. Call us to see the difference.