Rent-vesting is an increasingly mainstream strategy for those seeking to break into the property market or expand their portfolio without impacting their lifestyle.
It breaks the traditional approach of buying a property and living in it. It means you can rent in the area you love and buy in the suburb you can afford.
It’s a powerful strategy for young buyers in good jobs but with insufficient equity and cash flow to buy into the inner-city or expensive areas, where they want to be based.
Another rent-vestor approach is to purchase a family home for later years, locking in their future while staying in the city to enjoy the benefits of bars, cafes and restaurants, and reduced commute times.
But be aware that rent-vesting is a long-term play. Capital gains can take years to realise. The essential advantage, of course, is receiving rent to ease those mortgage payments.
Here are some tips if you are considering the strategy:
Capital gain from property takes time, so make sure it matches up with your other personal and financial goals. Accept that it will take a calculated risk to enhance your wealth. Don’t be intimidated, just do your research.
The best capital gain comes from suburbs that are on the up-and-up. Spend time seeking out the best potential areas where you believe prices will rise fastest.
Your purchase must be attractive to potential tenants as any property can crush your cash flow if it’s vacant. Ask your local real estate agent for recommendations on the types of homes in the area that are popular with renters.
Ensure your property offers easy access to transport, shops, schools and other amenities. Poor local transport is a real turn-off with potential tenants.
A good accountant will also maximise the tax benefits of being a landlord and it can also be valuable to talk to a financial advisor.
Other Investing Considerations:
The rent may not cover the entirety of the mortgage or additional costs such as council fees or repairs. Make sure you can cover any shortfall.
Lenders tend to charge a higher interest rate on an investment loan. Discuss the best way to structure your finance with your mortgage broker.
Most investors use a property manager to look after their property and pay 6-9% of the rent in fees. They’ll help set the rent, negotiate with potential tenants and handle any maintenance requests. Ensure you budget for their expenses.
If you buy a unit or townhouse, predetermined body corporate fees will apply. With a house, maintenance costs are likely to be higher. Remember to budget for rates, insurance and repairs and maintenance.