Our resident Wealth Creation Specialist from Ample Property Solutions, Joe Dirani weighs the odds of rentvesting versus long-term investment yields for millennials who take their retirement planning seriously.
By Joe Dirani
GenYers and millennials have had the adage ‘buy the worst house in the best street’ drummed into them since they were little Saturday morning nippers. Work really hard, pay it off in thirty years and you’ll be set for life.
Strategies of trying to make your money work for you, rather than the grind of you working for your money has opened up alternative investment strategies in the marketplace, particularly for investors who are keen to gain a foothold in the perennially hot, and seemingly, unobtainable Sydney property market.
You may have heard the term ‘rentvesting’ as an alternative narrative to what earlier generations were taught by their parents. The traditional paradigm of purchasing the family home first, and then investing surplus capital into real estate or shares is still viable, but rentvesting does offer a smart alternative.
Rentvesting simply means investing before purchasing your own home. It may seem counter-intuitive, but it can be the smartest and quickest way to obtain your dream home in a competitive market.
Housing is still considered the most stable asset class. Domain Group’s March House Price Report 2016 says Sydney’s median house price is AUD995,804 and apartments, at AUD656,166.
For arguments sake, if a buyer has AUD150,000 for the deposit on a house worth AUD995,000 (which is a feat for independent people under thirty years of age) and they sign up for a home loan at roughly 5% (interest and principle) this would mean the total cost of the life of the 25-year loan would be nearly double the purchase price.
The cost of living in an owner-occupied house in an area in Sydney that you would like to live in, would therefore cost approximately AUD4,000 per month.
If we compare the math to rentvesting, the median weekly rent for houses in Sydney is AUD600 per week which works out at AUD2,400 per month.
The numbers don’t lie. If a person, for half the spend, can live in their desired location, while renting, but can afford to service a loan of AUD4,000 per month, this opens up a substantial, investment opportunity without having to compromise on perceived ‘quality of life’.
History has proven that growth and strength of property provides steady, long-term investment gains, which makes property still one of the most stable options for long-term retirement planning.
Considering a property investment strategy outside of Sydney, with a market value of around AUD500,000 would potentially yield greater capital gains than the Sydney market which currently stands at about 4-6 percent per annum.
Accordingly to Knight Frank’s Australian Residential Review in July 2016, “population growth, increased employment in local industries, as well as being situated within a reasonable distance for construction and tradespeople to contribute to the heightened construction activity in the northwest and southwest growth corridors of Sydney” means some coastal areas within a two hour commuting distance saw higher capital growth rates than Sydney in 2016.
Rather than emotional investing in your own backyard, with a possible lower return, the numbers currently suggest that rentvesting in cities which will give greater return on investment over the long-term is a good argument to defer living in your dream home until you’ve got a solid property investment portfolio. Investing in new developments also offer tax benefits, in selected areas, which also add to the overall performance of your property investment strategy.
Rentvesting as an investments strategy is not without its detractors. According to Director of UNSW City Futures Research Centre Hal Pawson, he argues that, “You have to ask whether there would be anything like rentvesting at current levels if the distortions in the tax system weren’t there”.
Some would argue that the tax benefits offered by the Australian government, to investors in new properties are not, in any way, a form of ‘tax distortion’. Rentvesting, for better or worse, is here to stay in Australia and it’s worthwhile considering it as a viable investment strategy – particularly for new entrants into the Australian property market. Happy house hunting rentvestors!