Property investing while renting

I am at the stage of my life where many of my friends are considering buying their first property. They are approaching me with questions like, “How much of a deposit do I need?” or, “Should I buy a property with my partner or alone?” The majority of them are hoping to buy a home to live in – a trend which I believe has been passed on from our parents’ generation. Their attitude towards property was to buy your own house, pay it off as quickly as possible and avoid debt.

The most obvious issue here is that very few of my friends can afford to buy where they want to live, such as Melbourne inner suburbs Fitzroy, Richmond and South Yarra – hardly first homebuyer markets. The secondary, and more important, issue is that buying a home to live in might not necessarily be the best financial decision for them.

Purchasing an investment property whilst continuing to rent where you wish to live is a practical and viable way to get into the property market. Reasons why I don’t think Generation Y consider this option include:

Not realising it is an option: The great Australian dream is to own your own home, and the idea of investing hasn’t even crossed their minds. I believe this is due to a lack of general awareness and education about investing amongst my generation. Unless we pursue this information ourselves, it rarely gets presented to us until we seek professional advice.

Wanting the security of owning their home: For anyone who has been served notice to move out of their rental property, or who has been told they can’t hang paintings on their walls by their landlord, owning your own place and being able to improve it has many benefits. But these benefits need to be weighed up against the costs of owning.

Thinking you need a big deposit to start out: Depending on your financial position, five per cent deposit is all that's required to purchase an investment property. In some situations, such as your parents going guarantor, you can borrow up to 105 per cent, which includes purchasing costs such as stamp duty and solicitor fees. The most affordable investment property we have purchased recently for a young, single professional lady was a two-bedroom unit in Ballarat for $171,000. With a five per cent deposit, she contributed less than $15,000 of her savings towards the purchase. In Melbourne, an entry-level two-bedroom apartment in an investment-grade suburb such as Footscray or Kingsville will be $300,000-$350,000.

Thinking it costs a lot to hold onto an investment property: The decision about how much to spend and how much rent you’ll need your property to generate will depend on how much money you want to contribute on a monthly basis (before tax benefits such as depreciation or negative gearing returns). Your borrowing power will also assist in determining how much you're able to spend. Some examples of recent purchases we’ve made for our clients show that you don’t need to live on baked beans to have an investment property:

For a rough comparison, the mortgage repayments on a $400,000 loan for an owner-occupied property will be around $535 per week.Technical info: figures are based on a 105% interest-only loan and 4.85% interest rate. Includes 0.5% maintenance costs, management fees, body corporate fees, rates and insurances.

Not understanding the tax benefits of owning an investment property: Most people have heard of negative gearing, which means that what you spend on the property exceeds the rental income. Whilst I’m not an advocate for purchasing for the purpose of negative gearing, it can have a significant impact on your cash flow, depending on your taxable income. Unlike an owner-occupied property, many of the expenses associated with an investment property (including interest repayments) are tax-deductible.

Not knowing where to start: Seeking professional advice is vital when making a large financial decision. Seeing financial planners, mortgage brokers and accountants is recommended in order to create a personalised strategy and to determine your budget and cash flow requirements. Making sure you find professionals who share your values can make your investment journey achievable and sustainable.

The idea of ‘rent money is dead money’ only applies if you aren’t putting your savings towards something else which will appreciate. The benefits of investing whilst renting are tangible in the short term (renting where you want to live) and substantial in the long term (getting into the market and building your investment portfolio).