Rentvesting is a home buying strategy, which is changing the landscape of home ownership for first home buyers.
With housing affordability and interest rates high in recent years, many hopeful home buyers have found themselves priced out of the locations they want to live in.
A further setback to some first home buyers was the removal of the First Home Grant back in May, which in the year to February 2024 nearly 42 percent of first-home buyers accessed.
What is Rentvesting?
Rentvesting is where a buyer RENTS a house in a suburb they want to live for lifestyle preferences, while BUYS a property as an investment somewhere more affordable and rents that out to tenants.
Buyers wanting to invest should look at areas of growth, capital gain and good rental return vs. where they would like to live personally; a suburb they might not be able to afford to purchase in right now, but they want to live in for lifestyle and location.
A benefit of Rentvesting is to get on the property ladder and start generating income from that investment property sooner than purchasing a dream home.
This emerging home buying strategy is growing in popularity in Australia and NZ, amongst first home buyers who value flexibility, lifestyle, and the opportunity to build wealth over time.
By owning an investment property, you could benefit from capital growth and rental income which can help build equity and increase your ability to leverage this to purchase another property in the future – one that you may want to live in.
How is Rentvesting – a home buying strategy, different from investing in shares or the stock market?
Property is a tangible asset – offering direct ownership, allowing greater control and peace of mind. Historically, over extended periods of investment, real-estate tends to exhibit reliable and foreseeable returns.
Data from REINZ indicates that property has consistently yielded an average annual capital growth of approximately 6%. Housing is a necessity and as population increases, the demand for property continues to grow.
Managing a property requires some level of oversight, but it can be relatively passive compared to running a business or actively trading. Property management services can manage day-to-day tasks, take things off your plate and reduce your workload.
As debt is paid down, an investment can be positively geared, creating a stable income stream. Rental income and capital growth are provided by property over time.
Traditionally, residential property investment has been favoured by banks in New Zealand. With the right advice and strategy, some banks are willing to finance property purchases up to 100% of their value, subject to individual investor circumstances. This is not a possibility for alternative investment options hereby allowing a significant opportunity for prospective investors.
Why does Rentvesting appeal to Millennial and Gen Z Buyers?
The Rentvesting home buying strategy tends to appeal to Millennials and Generation Z buyers as they often value flexibility, experiences and freedom of lifestyle choices, and they are not as tied to the idea of homeownership as previous generations.
This home buying strategy allows you to live the suburb you love (or even overseas), while having the opportunity to invest in property and build wealth.
With impacting factors like the cost-of-living crisis, high interest rates and removal of the first home grant, younger buyers are facing financial challenges and difficulty saving for a deposit. This home buying strategy could be the answer.
Rentvesting Scenario – Steph from Grey Lynn
Steph currently lives in her desired suburb of Grey Lynn Auckland, paying $850 per week in a house that would sell for $1,500,000. She would love to buy a house just like this one, but she’s not sure it will happen anytime soon.
She has $75,000 in savings and knows that if she wants to purchase a property in this area as an owner occupied, she will need minimum 10% deposit now or $150,000, serviceability dependant.
To save for a deposit of $150,000, this would take Steph a further 5 years of saving at approximately $697 per month including compounding interest.
In 5 years time, using an average growth rate of 6%, the house she wanted to purchase now has a market value of $2m, which takes it out of her reach even though she has reached her savings goal.
If she considers Rentvesting instead, she could use the $75,000 she has saved as deposit to purchase a $750,000 rental property.
Renting this out at 4.7% yield and topping the cash flow of the property up by $697pm instead of saving the money, in 5 years time this property investment is now worth $1m with a net gain to Steph of $227,000.
Recapturing the initial deposit of $75,000, this client then has $300,000 as a deposit to purchase a property compared to $150,000 of saving with compound interest. Now, that’s a sensible home buying strategy!
