How Shrewd First Home Buyers Can Enter The Market By Rentvesting
Palash Dave
Founder & Director | MBA l Property Strategist Investment Mentor Buyers Agent Home & Land Package Specialist
Buying your first home can be challenging, whether it’s an owner-occupied home or an investment property that will grow your wealth through capital gains and rental income.
But you might not realise that there are some suburbs where it’s cheaper to buy the typical home than to rent it. Of course, you would still need to stump up a deposit, but the cost of owning the home (e.g. mortgage repayments, council rates, insurance) would be less than the cost of paying the market rental rate.
The calculations could tip further in your favour if you bought a positively geared property for investment purposes, because then you would also be earning rental income.
Buying v renting
According to the?PropTrack Buy or Rent Report, it’s cheaper to buy than rent in 27% of suburbs in Australia.
That is based on a range of assumptions, such as the owner:
Furthermore, PropTrack assumes the property will grow in value by a very conservative 3% per year.
While PropTrack found it’s cheaper to buy than rent with 27% of homes, that’s a national average that applies to all properties in all states.
As the chart below shows, that figure changes when we look at specific types of home (three-bedroom houses and two-bedroom units) in different states.
If you’re a first home buyer and you’re struggling to enter the market – particularly in New South Wales and Victoria, where only a small share of homes are cheaper to buy than rent – one solution might be rentvesting.
How rentvesting works
Rentvesting is when you rent a property in the location where you want to live and buy a rental property in a location where you can afford.
For example, you might rent a property in the inner or middle rings of Sydney and Melbourne, where property prices are beyond the reach of most first home buyers, and buy an investment property in, say, a regional location where prices are much lower but there is still likely to be significant long-term growth in property prices and rental rates.
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For example, in the year to June, the combined regions outperformed the combined capital cities in both price growth and rental growth, according to CoreLogic.
Annual price growth was 24.2% in the regions and 11.3% in the capitals:
Annual rental growth was 10.8% in the regions and 9.1% in the capitals:
The point is not to suggest you should always buy an investment property in the regions or that every metro location is bad. In fact, there are a lot of great capital city locations and a lot of poor regional locations. Rather, the point is that if you’re a?first home buyer, renting in a capital city and investing in a regional community can be a very smart move. (That said, you could also buy an investment property in a cheaper capital city location, if you preferred.)
An expert buyer's agent can help you earn strong investment returns
If you’re a first home buyer and you decide to go down the rentvesting path, it would be a good idea to partner with a skilled investment strategist.
That’s because it’s very hard to know the best investment locations if you don’t immerse yourself in property data on a daily basis. Also, even if you did know where to buy, it would still be hard to separate the quality properties in that area from the bad ones.
High Income Property can help you identify a location that is likely to enjoy strong price growth and rental growth over the long-term, and help you negotiate the purchase of a quality property in one of those locations.
Your investment property could then enjoy significant capital growth in the years ahead, thereby giving you the equity you need to one day buy an owner-occupied home. In the meantime, the passive income you earned could help you pay off the mortgage on your investment property.
And while you’re building equity and collecting rental income, you could continue renting in your preferred location.