Australia has a love affair with real estate. For many of us, a home is not only a place to raise a family, but also a way to build wealth for the future. We've all heard the classics, “save for a house, and pay it off as quick as you can”, and “rent money is dead money, you’ll be paying off someone else’s mortgage.” Sage advice right? Only one catch – housing affordability has priced many people out of the market. Or has it? ‘Rentvesting’ has started to gain some popularity and if you have been looking to break into the market, it could be the answer you have been searching for.
So what is rentvesting? While the term itself is relatively new, the concept is much older. Rentvesting can be seen as the best of both worlds, allowing you to live where you want (rent), while purchasing an investment property somewhere less expensive.
For example, say you want to buy a three-bedroom apartment close to the city, but the current market puts these apartments out of your reach. You could choose to rent the ideal three-bedroom apartment where you want to live, and then purchase a property in a suburb where prices are more affordable. This property can then be rented out to help cover your mortgage.
This strategy lets you enjoy the lifestyle you want now, while at the same time building a property portfolio for the future.
If we break it down even further, let’s assume your apartment close to the city will cost you $750K to buy and you have negotiated a mortgage of $600K and were paying Principal and Interest repayments at 6.2% of $3,674 per month.
Alternately, you could probably rent the same property for about $500 per week, which is $2,170 each month. This leaves a difference of $1504 every month to invest in other assets, like our less expensive investment property.
Obviously, you need to have the discipline to invest the $1504 rather than spend it but this strategy may be an alternative to creating wealth for their future while still allowing you to live where you want.
The above example also assumes that you have a saved a substantial deposit to put towards the purchase and qualify for a loan of $600K. So, if you are not in a position to buy the apartment you really want right now, maybe rentvesting is a strategy that could work for you?
If you would like to discuss your current borrowing capacity or would like to explore the rentvesting concept further let’s catch up for a chat.
Stay Safe!
First Avenue Finance Team!