🚀 AI-picked stocks soar in May. PRFT is +55%—in just 16 days! Don’t miss June’s top picks.Unlock full list

First home, second thoughts: Rentvesting onto the property ladder

Published 17/04/2024, 04:19 pm

It's often said that there’s a whole cohort of young Australians who may never find themselves able to enter the property market.

Soaring house prices have emerged as a major barrier, making it appear near-impossible for many to purchase their own home.

Australia’s median dwelling value has surged above $770,000 – more than 11 times the annualised median weekly earnings of an employee, according to data from CoreLogic and the Australian Bureau of Statistics (ABS).

In the major capital cities, the median dwelling value is even higher, coming in at more than $1.1 million in Sydney, nearly $780,000 in Melbourne, and close to $820,000 in Brisbane.

It makes sense then, that more first home buyers are choosing to look further afield to buy property. Though, not necessarily to live.

Belinda Jackson, head of retail for digital-only home loan provider Tiimely Home, says they’re seeing a “clear trend” of more first home buyers, particularly singles, entering the market on the purchase of an investment property.

More than one in twenty first home buyers are choosing an investment property for their first property stepping stone, separate home loan figures from the ABS and Tiimely Home reveal.

This practice is often referred to as rentvesting – buying a rental property while also renting elsewhere. Of course, some first home buyers purchasing investment properties may still be living under the roof of mum and dad – let’s call them ‘nestvesters'.

One rentvesting first home buyer is Lawrence Petruzzelli.

Mr Petruzzelli is an accountant and entrepreneur in his early thirties who recently bought his first property in South Australia’s Mount Barker – nearly 2,000 kilometres from his home in Brisbane’s inner suburbs.

“I discovered that what I could afford to rent was usually a lot nicer or in a better location than what I could purchase,” Mr Petruzzelli, who goes by @lawrencepetruzzelli on Instagram and TikTok, told Savings.com.au .

Before rentvesting, Mr Petruzzelli had decided he didn’t want to buy an apartment due to the historical performance of the unit market, but he also didn’t want to compromise on his flexible, inner city, low maintenance lifestyle.

“I'm fortunate enough to be able to rent a small one bedroom apartment, and because I have a minimalist lifestyle – I work a lot and I'm normally out of the house anyway – that allows me to keep my rent lower than what I'm receiving as rent from this property deal,” he said.

“I pay $580 [per week for rent] and I get $630 [per week in rental income]. So, at least this way, it's a little bit of extra cash flow on top.”

Looking forward, Mr Petruzzelli has no plans to buy a home to live in.

He hopes his four bedroom, two bathroom house, purchased as a house and land package, will climb in value while he pays down his principal balance. All going to plan, he aims to one day leverage the equity in his property to purchase another investment property. Meanwhile, he could realise tax benefits offered to property investors, such as negative gearing.

He also rejoices in the knowledge he can pack up and move his lifestyle whenever he wants to.

However, many rentvestors don’t enter the investment market in a bid to upkeep a mobile lifestyle.

Others take the leap into property investment and homeownership simultaneously so as to preserve a lifestyle they can’t afford to own – yet.

“It's not a new strategy,” Aus Property Partners director Lloyd Edge told Savings.com.au . “It has been around for a number of years.

“High interest rates, coupled with high property prices, mean fewer and fewer first time buyers can buy where they want, or need, to live.

“If they were to buy an investment property in a location where the rent more or less covers the mortgage, they can own a property without it affecting their lifestyle.”

Indeed, Ms Jackson notes that some first home buyers entering the market as investors actually don’t rent at all.

“Many are adopting a ‘landlord first’ approach and leveraging their purchase to rent while they continue to live at home,” she said.

“This allows them to leverage rental income as a springboard, ultimately helping them save for their ideal home down the line.”

Rentvesting can also bolster a person’s borrowing power. That’s because lenders will typically consider the rent a property is expected to bring in as available income, as Mr Petruzzelli found.

“Because the rental income was higher than the rent I pay and my expenses are quite minimal, my borrowing capacity was significantly higher rentvesting than it would have been if I were an owner-occupier,” he said.

“The only negative was that I had to put a 20% deposit down … if I were an owner-occupier I could have put just 5% down.”

Where are rentvestors and ‘nestvesters’ buying in 2024?

According to data from Tiimely Home, rentvesting (and nestvesting) appear to be growing in popularity in Victoria and Western Australia this year, while it appears to be on the decline in Queensland and South Australia.

The lender’s products – digital-only home loans with competitive interest rates demanding deposits as small as 10% – are particularly appealing to first-home buyers and cohorts such as investors and the self-employed, Ms Jackson said.

Over the first 14 weeks of 2024, approximately one in five first home buyers in Victoria, NSW, and Western Australia borrowing through Tiimley Home purchased an investment property.

That dropped to one in ten in South Australia, 4% in the ACT, 2% in Tasmania, and less than 1% in the Northern Territory.

It’s worth noting that Tiimely Home doesn’t lend to borrowers purchasing outside of Australia’s capital cities and major regional centres.

Some of the market’s most competitive investment home loans

If you’re interested in purchasing an investment property in the near future, its worth keeping your finger on the pulse of the market.

We’ve rounded up some of the lowest-rate investor loans available right now.

Rentvesting: Strategic genius or sign of struggle?

If you’re struggling to break into the market, purchasing an investment property away from where you wish to live might seem like an obvious solution.

However, it likely won’t be one that every first home buyer wishes to pursue.

The vast majority of wishful homeowners have had their dreams delayed by the cost of living crisis, the latest Westpac Home Ownership Report found, with half now willing to rentvest in order to purchase property.

Highlighting the despair that many once-hopeful first home buyers appear to be feeling in 2024 is research from InfoChoice.

The InfoChoice Rent Crisis report, surveying 1,000 Aussie renters, found more than a third believe they will never be able to afford a home.

That suggests that rentvesting might be less a choice and more a lifeline for many engaging in the strategy.

More than 540 investment home loans were provided to first-time buyers in February, according to the latest ABS Lending Indicators.

Those 540 make up more than 5% of first home buyers borrowing to enter the market that month – down from a peak of nearly 8% in 2022, as the below chart shows.

First home buyers as investors

It’s worth noting that the peak in apparent rentvesting was realised months before the Reserve Bank of Australia’s first cash rate hike of this cycle.

Meanwhile, traditional investors appear to be returning to the market, evidenced by a spike in new investment home loans signed in February.

“The combination of a potential peak in interest rates, making borrowing for investment cheaper than ever, [coupled with] a rental market at record highs, investors are surging into the market to secure their property,” Ms Jackson said.

Rentvesting: Risk vs reward

It’s important to balance the risks and the rewards of rentvesting.

After all, a rentvestor might have to battle through a period in which their investment property sits empty.

They could struggle to find a rental property to live in and be forced to increase their own housing costs.

And both scenarios playing out simultaneously will always be a possibility.

Managing such risk is key to success, according to Mr Edge.

“There are ways to mitigate those risks – doing proper research, ensuring you’re buying in a good area,” he said.

“You want to buy in a suburb where there's plenty of demand, good jobs growth, [and] good population growth, so that you won’t have an issue finding tenants.”

“You want to make sure you're getting something that you're confident will perform well over the long term because it is a wealth creation vehicle.

“In five, ten years down the track, you want to have created some equity you can utilise to, maybe, get into your own home later on.”

"First home, second thoughts: Rentvesting onto the property ladder" was originally published on Savings.com.au and was republished with permission.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.