How do I make rentvesting work?

Money Magazine Australia - - COVER STORY -

Play­ing the prop­erty game isn’t that easy for gen Ys in our two global cities, Syd­ney and Mel­bourne. We have watched prices surge on the back of lower in­ter­est rates and years of un­der­sup­ply. The net re­sult is that more lo­ca­tions than ever be­fore are be­yond the reach of most gen Ys.

What’s more, for the past 10 years or so th­ese pro­fes­sional gen Ys have rented in cos­mopoli­tan ar­eas, en­joy­ing the ben­e­fits of be­ing close to “ev­ery­thing” to live, work and play. So they can’t bring them­selves to the idea of mov­ing “out wide” and deal­ing with ex­tended daily com­mute times, on top of their long work hours, or the lack of va­ri­ety in the lo­cal amenity that they now have come to ex­pect.

Our global cities come with global price tags for houses with any land con­tent, as this lim­ited sup­ply is swamped by ex­ces­sive de­mand. The harsh re­al­ity is that this trend will not stop as the pop­u­la­tion of our two big­gest cities is fore­cast to dou­ble in size over the next 34 years to 8 mil­lion each. But all is not lost for gen Y or oth­ers who choose to rent where they want to live but still want to get onto the prop­erty lad­der via a “rentvesting” strat­egy.

Rentvesting works best where the dif­fer­en­tial is great­est be­tween the re­pay­ments on a home loan com­pared with what it would cost to rent a sim­i­lar prop­erty in the same lo­ca­tion. This is best il­lus­trated by way of an ex­am­ple. Let’s look at prop­er­ties in Essendon-Moonee Ponds in Mel­bourne, where you can find fam­ily homes worth around $1.5 mil­lion.

Let’s as­sume we bor­row 80% of its value, mean­ing our loan would be $1.2 mil­lion. At a long-term in­ter­est rate es­ti­mate of 6% (prin­ci­pal and in­ter­est loan over 30 years) our monthly re­pay­ments would be $7195, or $86,340 an­nu­ally. Yet there are sim­i­lar prop­er­ties avail­able for rent in this area, and the rental yield is only 2% for a stan­dard but func­tional place. That yield equates to an an­nual rental com­mit­ment of $30,000.

So many of th­ese gen Y and other cou­ples sim­ply couldn’t af­ford to buy a house in this up­mar­ket lo­ca­tion. How­ever, with a po­ten­tial sav­ing of over $55,000 a year in cash flow, this ad­di­tional money could be used to start, or add to, a fam­ily – say $20,000, leav­ing over $35,000 a year avail­able to in­vest. This sur­plus could buy at least one or pos­si­bly even two in­vest­ment prop­er­ties. That en­sures they are get­ting their own money work­ing harder for them in build­ing their own equity and wealth story. If you are af­ter high cap­i­tal growth, fo­cus on ar­eas with high de­mand and low sup­ply, prefer­ably houses, town­houses or vil­las with some land. You might even buy in the same lo­ca­tion where you are rent­ing that big­ger prop­erty! Let’s be con­ser­va­tive and use only $30,000, sav­ing $5000 a year for re­pairs and main­te­nance. If we buy a du­plex or town­house for $900,000, as­sum­ing an 80% loan to value ($720,000 loan at 6% prin­ci­pal and in­ter­est over 30 years) our an­nual in­ter­est and prin­ci­pal re­pay­ments would be $51,800.

On the in­come side, let’s as­sume that with a yield of 3% our an­nual rent would be $27,000. Over­all, and with­out fac­tor­ing in any neg­a­tive gear­ing ben­e­fits, the short­fall of $24,800 ($27,000-$51,800) is well cov­ered by the $30,000 we had set aside. The big­ger t he dif­fer­ence in out-of­pocket cash flow be­tween own­ing ver­sus buy­ing, the more it makes rentvesting worth con­sid­er­ing. A good rule of thumb is a dif­fer­en­tial of greater than 3% be­tween the costs to buy ver­sus the costs to rent.

It’s not a per­fect out­come for all gen Ys or oth­ers in this sit­u­a­tion but it does en­able you to live where you and your fam­ily want to live and also put your money to work to build a portfolio of prop­er­ties to pro­vide you with greater wealth and in­come for re­tire­ment.

Newspapers in English

Newspapers from Australia

© PressReader. All rights reserved.