Rentvesting in Australia: A deep dive

17 April 2024
Matthew Hughes
Source: The Property Tribune
Written By: Thierry Ng
  • Rentvesting allows first-time buyers to rent where they want while investing in a more affordable property elsewhere.
  • Evaluating location, price, and potential growth is crucial for choosing a suitable investment property for rentvesting.
  • Seeking professional advice from qualified experts is essential for successfully implementing the rentvesting strategy.

The state of Australia’s rental market is nothing short of sordid. The news cycle is rife with stories of rents punching through records— a pattern not likely to abate soon, considering how net migration continues to rise while the construction industry struggles to deliver new homes to cope with existing demand.

As rent prices get closer to mortgage repayments in some areas, home buying has become more appealing to long-time renters eager to escape the rent trap.

However, a cursory search of properties in areas most home buyers want to live in – lifestyle locations with easy access to amenities – will stump most homebuying aspirations.

For the average Australian living on an average income, your first home will likely be a stepping-stone home, with concessions made regarding the type of home, age, or location.

The dream of owning a four-by-two in a central location is becoming increasingly unattainable. Rising property prices have pushed people to consider properties further out, where they can still benefit from land value gains.

One promising avenue to homeownership that is gaining traction is rentvesting. This strategy offers Australians the opportunity to rent homes in their desired locations while investing in a more affordable property elsewhere, thereby gaining a foothold in the property market.

“Rentvesting is a strategy that many first-time buyers employ when they are unable to purchase in their location of choice, such as where they currently reside, but can afford to purchase in a more affordable area elsewhere,” said Property Investment Professionals of Australia (PIPA) chair, Nicola McDougall.

Nicola McDougall
PIPA Chair, Nicola McDougall. Image: PIPA

“This ensures that they aren’t locked out of property ownership. Rather, by rentvesting they can embark on their property journey earlier, with an eye on purchasing a home in the years ahead,” she said.

A fascinating ‘best-of-both-worlds’ concept, it may also seem daunting for first-time buyers, considering how they must grapple with the expense of having to rent and service a mortgage simultaneously.

Why rentvesting?

Buying a first home is about buying the best asset you can own with the resources you currently have at hand.

“From a wealth-building perspective, rentvesting, in the right market conditions, can offer a strategic advantage to first-time buyers by allowing them to enter the property market sooner than they might otherwise be able to,” elaborated Capital Property Advisory Managing Director, Matthew Hughes.

“We have dealt with many clients over the years who are living at home and are happy to continue to do so while they focus on building an investment portfolio. If you don’t have the luxury of low-cost living at home with Mum and Dad, then you have to assess current property values and rental yields to decide whether rentvesting, in the current market, is right for you,” he said.

Hughes’ last point poignantly reminds us of the challenges Australia’s renters face, stuck between unceasing rent hikes and inflated home prices, and that not everyone has the same starting point in their property journey.

“Pre-COVID in Perth, when the median rent for a house was an astoundingly low $350 per week, rentvesting made a lot of sense for most people,” he said.

“Now that there seems to be relative parity in the cost to rent versus the cost to buy, it becomes more about your personal financial situation and preference.”

Matthew Hughes, Managing Director at Capital Property Advisory
Capital Property Advisory Managing Director, Matthew Hughes. Image: Capital Property Advisory.

Crucially, Hughes stressed the distinction between property investment and a primary residence, each requiring separate value judgements.

“The key difference between viewing a property as an investment and as a home lies in the potential for emotional attachment and the decision-making process,” he said.

“An investment property is typically selected based on its potential for capital growth and/or rental yield rather than personal preferences or lifestyle considerations.

“This approach enables investors to focus on markets that offer the best returns rather than being limited to where they can afford to live. Often, when you try to blend your lifestyle requirements or personal preferences into an investment brief, one or both will have to be compromised.”

When should you invest, and when should you not

Rentvesting is a time-tested strategy employed successfully by many Australians keen on dipping their toes into the property game.

McDougall attested to having rentvested several times when moving to a new location.

However, Hughes emphasised that rentvesting should only be considered when market conditions support the strategy.

“Beyond this, it comes down to your personal circumstances, desired outcomes, where you want to live, and what type of property you want to live in,” he said.

“For example, if you desire to live in an apartment, then I would always suggest you rent the apartment you want to live in and invest elsewhere, in a dwelling that is more likely to support sound investment outcomes (i.e. something with land content).

“It’s particularly appealing for individuals who are willing to live in more affordable rental properties while investing in higher-growth areas.

“However, rentvesting might not be the best strategy for those who highly value the stability and emotional satisfaction of owning their own home, or for those who may struggle with the financial discipline required to manage both rent and mortgage payments effectively.”

McDougall added that prospective rentvestors must also be aware that they will not be afforded the same housing security as owner-occupiers, a concern particularly relevant in these trying times.

“You need to be aware that your rental property may not be available to you long-term, for example, if the owner decides to sell and you need to vacate,” she said.

“In the current rental crisis, it may not be easy to secure another rental property in this scenario.”

What makes for a good rentvestment?

To choose a good investment property, you must strategically evaluate several factors.

“Location is paramount; start at a macro level and identify a local government with a track record of sound town planning decisions and a progressive disposition,” Hughes said.

“Then seek to find suburbs and pockets within these suburbs that are likely to experience above-market growth over the long term. We tend to focus on houses in older suburbs that are mostly “built-out”, so they have little to no potential for new land supply beyond infill.

“Post-COVID, Perth people are living more hyper-local, so good infrastructure, access to amenities like major activity centres, transport and well-regarded public-school zones are key. These factors are all likely to attract quality tenants in any market conditions, as well as high levels of demand if/when you eventually sell your property.

“Price point is also critical; the goal is to find a property that offers a good balance between affordability, growth potential, and yield. Of course, all of the above is buyer-dependent, and you should spend time developing a target property brief that best suits you and your desired outcomes, timeframes, and yield sensitivity.”

If you are lost, remember that Hughes does this for a living.

“Rentvesting often involves purchasing in unfamiliar locations, including interstate, so it’s vital that anyone who is considering this strategy works with qualified property investment advisers rather than attempting to do it themselves,” McDougall said.

Financing a rentvestment

For those curious about whether financing rentvestments is easier or harder than financing homes you intend to reside in, the answer is: it depends.

“This varies depending on current macro-prudential lending policies and bank appetite for risk. At the moment, some banks are offering investors up to 95% Loan-to-Value Ratios (LVR) as they see lower risk in our rising markets,” Hughes said.

“A lender’s willingness to allow buyers to leverage at higher rates can vary a lot throughout a property cycle. You may also see the Australian Prudential Regulation Authority (APRA) intervene in bullish times to limit speculative investor activity, limiting an investor’s ability to secure more funding.”

McDougall also noted that lenders consider the income earned on an investment property through rent, making servicing calculations more favourable.

Additionally, Hughes said that rentvestments might be financed through schemes available to all first-home buyers, including duty concessions, grants, and incentives for building new products.

“Often, obtaining the first loan is not the challenging part of the journey—it is financing subsequent properties that can become difficult, especially if you do not have a substantial personal income and your first investment is not high-yielding.”

Matt Hughes, Capital Property Advisory.”

The keys to succeeding as a rentvestor

As with all investments, being a successful rentvestor requires diligence and discipline.

“Balancing a mortgage and rent payments requires a clear understanding of your cash flow and a commitment to maintaining an emergency fund to cover unexpected expenses,” Hughes said.

“As you take on more risk and debt over time, it is crucial to increase your ‘buffers’ to ensure you are prepared to service your loan repayments in the event of job loss, injury, or any other incident that results in you being unable to earn a personal income.”

“You will need to make provisions for expenses associated with property ownership such as council rates and body corporate fees, as well as repairs and maintenance,” McDougall added.

“It’s also vital to stay informed about the property market, make strategic decisions based on long-term goals rather than short-term fluctuations, and identify any headwinds that may cause financial stress and have you seeking to sell a property at an inopportune time,” Hughes continued.

The importance of seeking professional advice

Considering how first-time buyers will likely be new to property investing, and investing in general, both property experts agreed that it was essential to seek the expertise of a professional before rentvesting.

“Given the complexities of property investing and the significant financial commitment involved, seeking professional advice is crucial, especially for first-time investors,” Hughes said.

“Gone are the days where just buying any property was a solid first step – asset selection is critical to future success.

“A properly Qualified Property Investment Adviser (QPIA) who is PIPA certified, is a great start if your goals are purely property-centric in the early stages.

“A mortgage broker with experience helping clients build multiple property portfolios is a huge asset. They can provide invaluable guidance tailored to your personal financial situation and investment goals.

“A proactive tax accountant should also form part of your team, and advice should be sought on how to structure your portfolio to minimise risk and taxes.

“Over time, a financial planner should also be added to the mix. They can advise on risk insurance, help you map out a long-term plan, and also assist with diversification into other asset classes over time. The right advice can be the difference between a successful investment and a costly mistake.”

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