With the escalation of property prices in our major capital cities – where we are now seeing the average 20% deposit plus costs soar to over $250,000 – we are witnessing the emergence of ‘generation rent’. This new group of people are becoming locked out of an unaffordable property market, or forced to make major sacrifices to their lifestyle, including the location and size of their home dwelling; or even cutting back on the smashed avo and toast! So how does rentvesting help you to buy your own home?
How does Rentvesting work?
Sound Property has increasingly been involved with ‘Rentvestors’ – the renter who has decided to live where they want to live, and invest where it is smart to invest. Often the Rentvestor is investing in property that meets their current budget with the goal of growing their deposit to buy a home in their desired location at a future date.
However, buying only one investment property in a more affordable market for growth is likely to be offset by ongoing growth in their local or desired neighbourhood.
So how does the Rentvestor achieve their goal of renting their way to the top of the property ladder, if the ladder is always getting longer?
How long will the property ladder be in 10 years?
Property in Sydney increased a whopping 235% over the past 17 years, or just over 13% p.a on average!
Image 1. The cumulative growth in property prices of major capital cities, Source: CoreLogic
Let’s look at the prices of an average Sydney property in 10 years, with a conservative growth of 7% p.a and an average sale price today of $1,100,000.
Table 1. Average Sydney Property Prices in 10 Years
You will see from Table 1 that the 20% deposit required to buy in Sydney will rise from $275,000 today, to nearly $600,000 in 10 years. That’s a lot of smashed avo and toast to sacrifice!
Trying to save for a deposit the traditional way
Let’s now look at the traditional method of saving your way to a deposit. In Table 2 below, we have used an example where a couple have $60,000 in savings, earn a combined $160,000 p.a and have the ability to save 20% of their post-tax incomes. You will see that after a 10-year period they will have amassed around $330,000, well short of the $600,000 they require for an average Sydney property in Table 1.
Table 2. Saving for a deposit
Climbing the ladder
It is obvious that buying only one investment property for $450,000, with the $60,000 in savings ($45k for the deposit + $15k for stamp duty and costs), will not be sufficient to trade in for an average Sydney property in 10 years. So, how many “$450,000 properties” would it take to grow your equity and achieve the deposit of $600,000 required to buy in Sydney in 10 years?
Table 3 (below) shows the compounding effect of buying three investment properties over the 10 year period, and the final equity position of nearly $900,000. This is done by using only the initial savings of $60,000, and accessing the growth in the properties in Year 3 and Year 6 to buy a further two properties.
Table 3 – The portfolio approach
From this table, you can see that in Year 8 the equity in the investment portfolio overtakes the deposit required to get into the Sydney market in Table 1. This does not include any yearly savings, or having to make major sacrifices to one’s lifestyle.
At the end of the 10 year period the Rentvestor now has the option to sell down the investment portfolio to pay the required deposit in Sydney, and potentially even keep one of their investment properties.
There are obviously at lot of variables and assumptions in this example, such as finding properties that grow 7% p.a on average, balancing the cashflow, being able to borrow money and managing the property portfolio. However, it is a concept many Rentvestors are embracing. You don’t need to be an expert in each of these areas, however you do need the best team of professionals around you, including mortgage brokers, accountants, financial planners, buyer’s agents, solicitors and property managers.
Becoming a ‘First Home Owner’
So, would you rather try to save your way to a deposit larger enough to buy where you want to live, or rentvest and potentially do it much faster, without sacrificing your lifestyle along the way?
To accelerate your climb up the property ladder, and becoming a first home owner through rentvesting, it is important to pick the right investment property. Sound Property specialise in sourcing strategic real estate opportunities, tailored to client’s individual needs. With an uncompromising attention to detail, Sound Property strives to educate the client in all facets of property ownership, reducing risk and helping turn their investment ideas into a reality. Contact us today to begin your rentvesting journey and fast track your goal of home ownership.
Download here a copy of our Rentvesting ebook with tips for Rentvestors.
This article is provided for general information only and does not constitute personal advice, as it does not take into consideration your personal circumstances. Please consult a licensed tax or financial advisor before making any decision to invest.