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Australia’s next generation of home buyers have been urged to consider alternative paths to ownership such as “rentvesting” or risk being locked out of the property market.
New data has revealed the time it takes the average first-home buyer to pull together a deposit has been growing in every capital and wages can no longer keep up with the increases.
This trend has been particularly severe in our biggest cities, according to the PropTrack Housing Affordability Index.
A typical Aussie buyer needs nearly six years to pull together a deposit, with a 20 per cent deposit on a dwelling priced at the capital city median requiring $162,000.
PropTrack noted affordability was particularly strained for those aged 18-34 because of their lower incomes and reduced savings.
Experts said investment strategies such as rentvesting now offered a more realistic way for new market entrants to clear the deposit hurdle and keep up with rises in prices.
Rentvesting involves the purchase of cheaper investment properties while renting homes elsewhere.
Rentvestors then harness the growth in the value of those properties to build wealth – often with the goal of one day purchasing a residence for their own needs.
Binvested founder Nathan Birch, a former rentvestor and owner of over 200 properties, said the strategy made a lot more sense for some buyers than trying to secure a dream home right out the gate.
“People’s first homes are often not a particularly good investment,” he said.
“They may not be happy with what their budget can buy them and the interest is not tax deductible like it is with investment properties.
“The advantage of renting and investing is that you can rent a nicer house than you could afford if buying in pretty much every location in Australia, but you’re still benefiting from rises in values and rents (on the investments).
Source: PropTrack, REA, ABS
“You’re also free to invest in more savvy locations where the cash flow and the value growth stack up better than where you live.”
Empower Wealth’s Ben Kingsley, a former chair of the Property Investment Professionals of Australia, said those who couldn’t afford to buy where they wanted to live were taking a risk by renting alone.
“Rent money, as they say, is dead money,” he said.
“A great rule of thumb is that if your savings aren’t growing as quickly as prices are appreciating then you need to act sooner rather than later and adjust your expectations of what you can buy and where.”
Real Estate Buyers Agents Association of Australia president Cate Bakos said the key to making the strategy work was selecting “investment grade” properties that will increase in value.
“You don’t want your personal preferences to cloud your Judgement. A good performer may not be what you’d personally want to live in,” she said.
Rentvestors who made the wrong purchasing decisions would pay a high cost for their mistakes, Ms Bakos said.
“The risk is that if the property does not go up in value, it may make it harder to one day buy your own residence.”
The properties best suited to the rentvesting strategy were cheaper properties with scope for improvement located in areas where home values had risen little over many years, Mr Birch said.
“You want to buy at the bottom of the market, before the prices go up again. Good examples of areas that offer that now are far north Queensland and Perth.”
An investment property suited to rentvesting also needed to offer high rents relative to the mortgage repayments, Mr Birch added.
Ms Bakos, who has rentvested herself, cautioned that the approach only worked for those prepared fully commit over the long haul.
“You need to give the investment time to grow. That means you have to be prepared to keep it for many years. If you sell too soon, you will unravel any of the good you’ve done,” she said.
“As a rule, you cannot sell in at least five years as the cost of transacting will take away any of your gains. You need to prepare for any of the reasons that may prompt you to want to sell. That’s one of the most difficult parts.
“It’s like a relationship. People start with best of intentions but then they change. You have to envision what could cause it to end and have a plan for what to do in that situation to avoid selling.”
There are many different paths to owning your dream home.
Top Tips for Rentvesting
1. Be prepared to invest interstate or far from where you live as some of the locations with the best potential for the kind of value growth that will increase your wealth may not be in your city.
2. Aim to purchase houses with a higher land component as these properties appreciate faster. Ideally the land should make up 60 per cent of the property and the house about 40 per cent.
3. Houses that require minor improvements offer more scope to grow in value as they can be renovated. Brand new houses appreciate slower.
4. If you can only afford a unit, aim to buy in a smaller block. Many of the best performing units are often in blocks of less than eight as there is more land for each unit, the strata fees are lower and the apartments offer scarcity value.
5. Don’t sell too soon. To attain wealth through property investing your properties need time to appreciate.
Originall Published: Aidan Devine | Daily Telegraph | 6 September 2023