Co-author: Ben Kingsley
Many Kiwis see property as a desirable asset to hold because property values continue to grow over the long term and, importantly for people who are investors, the rent can form part of their passive income in retirement. The challenge for many, however, is being able to afford the type of property they want to live in, in the area where they want to live.
There are three main options:
- Yes, you can afford a property that suits you for now
- No, at that price point it doesn’t suit so you compromise and maybe buy in a location that’s more aligned to your budget
- You can choose to rent where you want to live in a property that suits, because it’s cheaper to rent than pay the mortgage repayments, but you’ll buy an investment property.
This third option is essentially the concept of rentvesting – a strategy where a person or family chooses to rent where they want to live, while putting their surplus money to work by buying an investment property to build wealth and to compensate for not buying an owner-occupied property.
As you’re buying an investment – not a first home – you can buy in more affordable areas away from where you live. When purchasing your property you can assess it as an investment, looking only at its ability to turn a profit.
Who does rentvesting suit?
Rentvesting works well across many income ranges. Financially it works best in locations where the monthly differential in rent payments versus mortgage repayments are highest. Conversely, it’s not generally a suitable strategy when the mortgage repayments are roughly the same as rent for a property within a desired location.
Rentvesting might suit:
- Younger people who have been priced out of inner-city locations
- Single-parent households where the location of raising a family is important
- Family households looking for superior locations and a suitable property to accommodate them comfortably
The pros of rentvesting
- Lifestyle: you rent where you want to live. There are lots of compelling reasons here: budget considerations, where you are at in your lifecycle, local amenity interests, safety and security, to name just a few
- Wealth building: because your borrowing power is greater and/or you are saving on higher mortgage repayments, your money could potentially work harder for you and your future by building your retirement nest egg
- Cost savings: as a renter, your landlord is responsible for the maintenance, upkeep and safety of the property, as well as covering costs such as council and some utility services (outside of usage), and any potential body corporate fees, etc
- All care no cost responsibility: again, as a residential tenant, it’s the landlord’s responsibility to maintain the property. They are responsible for ongoing upkeep and working order of the property. Any issues with electrical, hot water, leaks, air-conditioning, building deterioration, inbuilt fixtures and fittings and worn items are at the landlord’s cost
- Ease your property cost burden: your tenants help you out via the monthly rent they pay
- Go with the flow: because you don’t have the high-cost burden of buying, and due to housing flexibility and variety, the world is your oyster. You can mix it up as renting can give you that flexibility and potentially a variety of accommodation types, whereas due to high buying and selling costs, it’s not financially sensible to do this as an owner too often
The cons of rentvesting
- Emotional cost: you’re missing out on the Great Kiwi Dream. Many of us grow up dreaming of one day buying a property, making it our own and creating great memories
- Loss of control: one of the biggest frustrations and risks of renting is being told by the landlord that for some reason you must vacate the property. Ultimately, it’s their property and by rights they have control over it
- Peer pressure: don’t underestimate the potential judgement by some family and friends if you chose the rentvesting path, even if it’s more financially rewarding
- “Rent money is dead money” and therefore you need to invest to benefit from this strategy. If you decide to rentvest, but don’t actually buy an investment property, then you aren’t rentvesting at all – you are going backwards financially. The key is that you must invest that surplus money, otherwise it is dead money
What to look for in a rentvestment
Rentvestment can be a smart financial decision, but it could likely require a lot of work and isn’t a decision to be taken lightly. Below are a few pointers as to what you should look for when searching for a rentvestment:
- Cash flow neutral: look for properties that have a high rental return
- Affordability: only buy in an area that you can easily afford – never stretch your finances
- Capital gains: buy in an area that’s likely to increase in value
- Low maintenance: purchase something that needs little to no repairs or maintenance
Finding a cash flow neutral asset should be your priority, because with such a property you might be able to cover your mortgage repayments with rental income alone. This will make paying rent and owning a property at the same time easier.
Now, the message here isn’t to just drop everything and start rentvesting – that would be silly as everyone’s circumstances are different and forecasting isn’t an exact science. What this article should convey is that some serious considerations and planning should go into any property buying decision as your future self will thank you for it.
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