What is rentvesting and should you consider it?
Certain cities in New Zealand are several years and thousands of dollars ahead of others in terms of property price growth. Tauranga and Auckland are two perfect examples. The 2018 Demographia International Housing Affordability Report recently ranked the harbourside cities as the 12th and 13th least affordable property markets in the world, respectively.
If you live in areas like these it can be incredibly difficult to get on to the first step of the property ladder. That’s why it may be necessary to use an alternative method to get a leg up – like rentvesting.
Rentvesting is when you purchase a property as an investment and rent your primary residence.
What exactly is rentvesting?
In a nutshell, rentvesting is when you purchase a property as an investment while living in a rental property yourself. It may not work for everyone, but for those living in highly unaffordable areas such as Auckland, Tauranga or Queenstown; it could be the best way forward.
As you’re buying an investment – not a first home – you can buy in more affordable cities away from where you live. What’s more, when purchasing your property you can assess it as an investment, looking only at its ability to turn a profit.
Why is rentvesting a good idea?
Rentvestment is about securing your financial future, without sacrificing your lifestyle. Because paying rent is relatively affordable, rentvesting allows you to live where you want, instead of moving to an area of your city where you can afford to purchase property.
In the meantime, you’ll have purchased an investment property somewhere cheaper. This will potentially be increasing in value, while your tenants will slowly be paying off your mortgage, increasing your equity. This equity can be used later, as bank security to buy a home in your preferred area, or to purchase another investment.
As paying rent is relatively affordable, rentvesting allows you to live where you want.
As an example of how affordable renting is compared to buying in some areas, let’s look at the Auckland market. Say you’ve bought a property at the Real Estate Institute of New Zealand (REINZ) average price for Auckland – $820,000. You’d be on the hook for mortgage repayments of over $1,000 every week (assuming a market interest rate at 10 per cent deposit and a 30 year loan). For that amount, you could rent two homes at the average price for Auckland’s upmarket Viaduct area, according to New Zealand Tenancy Services data.
How should I assess a rentvestment before I buy?
Rentvestment can be a smart financial decision, but it may require a lot of work and it’s by no means a get-rich-quick scheme. Listed below is what you should look for when searching for your 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 may be able to cover your mortgage repayments with rental income alone. This will make paying rent and owning a property at the same time easy.
Rentvestment can be a smart financial decision, but it may require a lot of work.
High rental returns can usually be found in cheaper areas – and by buying units, apartments and smaller homes. However, assessing a home’s return is more complex than comparing its rental income to your mortgage repayments. When doing your sums, make sure you take into account expenses such as landlord insurance, repairs and maintenance, council rates, property management fees and the costs of vacancies.
What areas are ideal for rentvestment?
When looking for a rentvestment you need to look at the purchase from a purely financial perspective. With that in mind, the following areas should be considered.
- Dunedin city: boasts a median price of just $365,000, and an average rent of roughly $350 a week, according to REINZ and co.nzdata. Property here has also increased in price by 12 per cent over the year to January
- Whangarei: the average price in the northern city is $430,000, and the median rent is $395 for a three bedroom home. Property prices here have increased by 7.5 per cent over the year to January
- Wellington: the median price in Wellington is $630,000, however small apartments and units can be bought for far less. The average rent in a central suburb is around $500, but since there is a severe shortage of rentals in the city, landlords may be able to charge more.
Rentvesting isn’t for everyone. You should look closely at your circumstances and property prices in the area you live before making any decisions. If you decide it’s the way forward for you, get as much professional help as possible and speak to a local real estate agent to make sure your purchase is the right one.