12 Oct Rentvesting: Top 5 tips for a successful strategy
Rentvesting is the growing trend of people renting where they want to live, and investing where it is smart to invest. With the recent escalation of property prices in Sydney and Melbourne, many Australians are looking at their lifestyle, budget and potential, and making the smarter decision to rentvest.
Here are our top 5 tips for the rentvesting strategy.
1. Don’t just buy property in a ‘cheap’ area
As far as Rentvesting strategy goes, there is no problem buying affordable properties, especially if that is what your budget demands as a Rentvestor. There are, however, additional risks inherent in some of these cheaper markets which must be assessed. Two of the main risks in ‘cheap’ markets are unemployment and the relative affordability of mortgages.
If local residents don’t have jobs and are not earning enough compared to required mortgage repayments, then they are not going to cope with rental increases or have surplus cash to push prices up, which are both desirable for a Rentvestor. The good news is that attractive investments in affordable suburbs do exist. In order to maximise the performance and reduce the risk of an investment, check out Sound Property’s 15 Key Investment Drivers as part of a strategic investment plan.
2. Balance cashflow and capital growth
We see a lot of rentvestors drawn towards high yielding which are likely to be positive cashflow property. We find this is mainly due to the fact that they don’t fully understand how cashflow works and, out of fear, just look for property with high rental returns.
Although an important factor to consider when Rentvesting, high rental yields cannot be looked at in isolation by a Rentvestor. Positive cash flow properties with high rental incomes compared to expenses, are usually located in regional areas that lack a diverse range of drivers, such as population growth, employment, infrastructure and economic vibrancy. These investments can be, therefore, more volatile and risky.
Rentvestors would need to own quite a few cashflow properties to create any kind of substantial income stream once expenses were taken out. You don’t become truly wealthy on cashflow alone. You need to balance this with a strong, compounding capital growth component, especially if you want to take the portfolio approach when Rentvesting.
3. Low density over high density
Capital growth is largely driven by the relationship between supply and demand (amongst other things including affordability, infrastructure and employment). If you want the highest capital growth, then the basic economic premise is that demand needs to outstrip supply. Buying a 1 bedroom unit in a CBD high-rise, or a “House & Land package” in a large greenfield land estate, are both at risk of excess supply due to the ability to keep adding supply in the area. If you want to accelerate your way to the top of the property ladder by Rentvesting, then you need to avoid these types of property in favour of low density, low supply, owner-occupied areas.
4. Look for the 15 KIDs
Our 15 Key Investment Drivers identify the best markets and properties for capital growth and rental yield, and help reduce risk. Rather than starting with a property you like and trying to justify it as a good investment, start at a Macro level (ie: city) then move to a Micro level (ie: suburb), and then finally assess the Property level.
For example, if you are buying in a suburb with high vacancy rates, or a city with rising unemployment, then the performance of the investment can be severely impacted, regardless of the actual property and its features.
5. Don’t always look for the cheapest help
If you think it is expensive to hire a professional, wait till you hire an amateur! For the majority of Rentvestors on a budget, it may be tempting to scour the internet for the cheapest professionals to help transact and manage the property. These people can include buyer’s agents, property managers and solicitors.
Before enlisting them, it is advisable to ask for client testimonials or reviews to help prevent you making a costly mistake. Remember you are buying their experience and knowledge. In other words, an insurance plan for the success of your investment. After all, buying property is going to be one of the most important decisions of your life!
Download our Free Rentvesting ebook or call us on 1300 655 899 to discuss your investment strategy.
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.