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The lowdown on rentvesting

25 June 2018

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

Its been a hot topic for the media in the wake of our property boom. But is rentvesting really a magic bullet for securing your financial future? Find out if this rent-for-life and get rich strategy is all its cracked up to be.

When dinner party discussions get around to the subject of getting rich, property investing is bound to come up. Thanks to a sustained boom in property prices in Australia[1], real estate has long been seen as a surefire way to turn thousands of dollars into millions in just a few years. But with gloomier forecasts for the property market making headlines in 2018, rentvesting success stories are starting to sound more like a pipe dream.

Lifestyle and a foot on the property ladder

So just what is so great about rentvesting that it’s been turned into a buzzword? With the dwindling numbers of young people becoming owner occupiers, housing affordability is seen as a big problem, forcing a whole generation to give up on the great Aussie dream of owning their home. Rentvesting – owning a property and renting your home elsewhere – is being touted as the alternative to this lifestyle goal. You get to rent and live in a desirable neighbourhood where you can’t afford the deposit, let alone loan repayments, but still get on the first rung of the ladder by buying an investment property in another location.

Taken at face value, it seems like a winner. The idea of big gains in property value and great tax breaks from negative gearing can be pretty enticing. And perhaps many of us also have a bias towards property as something safe and familiar, compared with shares and other asset classes. But there can be drawbacks and problems with any investment opportunity, including property. Here are some expert views on the potential risks associated with rentvesting from our panel of three financial planners:

Sandy Hopps, CFP®, Strategic Planners, Toowoomba, Queensland

  • Don’t let the stories sway you – Sandy has wise words for people who might be taken in by stories of renvestors becoming property barons with multi-million dollar portfolios. “You should remember that most of these people have been using this strategy long enough to have enjoyed a number of significant market increases,” she says. “This means they’ve been able to use equity in these properties to leverage themselves into the next property and the next. While interest rates have been low, this may have worked very well for them. However, now that there is a slowing in the property market caution is needed, particularly when coupled with inevitable future interest rate hikes.”
  • Be aware of your investment costs – Hopps also reminds budding investors to take into account the substantial costs involved in purchasing and selling properties such as stamp duty, real estate commissions and legal fees as well as maintenance, council rates and other running costs. “Should the purchase not meet the needs of the investors, a forced sale could cost them a lot of money,” she says. “And, first home buyers using this strategy waive the right to the First Home Owners grant.”

Jeremy Chiel, CFP®, Stonehouse Group, North Sydney, NSW

  • Income and returns – how much you can expect to earn over time is an important factor in choosing any investment. But Jeremy is quick to remind potential investors that income and capital gains from property are not guaranteed. “The risks include your investment property failing to show much capital growth over an extended period of time or being without a tenant,” he says “The property’s value could even drop significantly, as has happened in mining towns and some rural areas across Australia in recent times.”
  • Property is not a “liquid” investment – if circumstances change and you need to access some –or all –of the money you have invested in a property, this can be a problem. “Many Australians are more familiar and comfortable with purchasing property compared to other types of investments such as shares,” says Jeremy. “While property isn’t as volatile as shares, it can often take considerable time to buy and sell property and it isn’t possible to sell part of a property if funds are needed.”

Matt Boxer, AFP®, GPA Financial Planning, Thornlands, Queensland

  • Can you afford a rentvesting strategy in the long term? – during his career as a financial planner, Matt has seen some clients live to regret an earlier decision to invest in property when their lifestyle and budget change. “Early in your working life, when there might be two incomes and no children, you might find you’re easily earning more than you spend and understandably want to do something productive with this savings capacity,” he says. “Unfortunately, taking out a large debt to purchase an investment property might cause problems when you approach the most expensive part of your life. Your savings capacity may easily cover an investment property now, but will it stretch to cover rent, a home loan, baby costs, child care and periods of potentially living on one income?”

Whatever your reasons for investing in property, its important to do your homework and compare property with other options that might be better suited to your needs. Find out more about coming up with the best investment strategy for you.

[1]Domain, How the housing boom created a new class system in Australia, Chris Koehler, 4 March 2018,“The boom, which saw house prices in Sydney soar 83 per cent in the seven years following 2010”