Rentvesting; what are the true numbers?
2017 has officially been deemed the year of the renter in Australia (especially Sydney). With property prices now above the $1 million mark in our largest city, and rents at a relatively low price point, renting is forecasted to become the accommodation of choice for the majority of Australians for the first time in history this year.
So, does that mean that Gen y’s and Millennials are going to be priced out of the property market permanently? Well if they are educated enough, no, absolutely not. In fact, I believe this offers a distinctive opportunity for motivated renters to enter the ‘rentvest’ market and reap the benefits of low rental rates and great investment opportunities interstate.
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Let me break it down for you…
Let’s say you earn a salary of $70,000 p.a. and you have managed to save $50,000. Now let’s also say that you are paying $300 pw and share an apartment in a desirable location with a median price of say $800,000 for a two- bedroom apartment. Now, if the above scenario is the case, there is very little chance for you to secure the finance for that property with a $50,000 deposit. Does that mean that investing in property is out of your means? Oh no, not by a long shot.
Some of the most successful investors we have worked with at Pure Property Investment still rent where they want to live and invest where they can make strong capital gains and cash flow. (rentvest).
So, how would one invest while renting in the above scenario?
Let’s say your objective is to build long-term capital growth and remain neutrally/ positively geared as to not impact your cash flow.
We would potentially look at a scenario which would reflect the below figures.
Strategy: Capital growth (primary objective) cash flow (secondary objective)
Budget: $300,000
Property type: This would depend on the individual circumstances, however for the majority of our clients the above scenario would entail a free-standing house with potential upside for value add/ equity gains.
Location: This would also vary depending on growth data, however based on the budget and objectives, we would be currently focusing on strong capital growth corridors in pockets of Brisbane and Hobart in the current market
Cash flow: We would look to target properties which will provide a 6.1 per cent gross yield or better and have a capital growth projection of 5-8 per cent in the coming year (or better)
So how does this look on paper:
Acquisition costs:
Purchase price: $300,000
Deposit (10 per cent): $30,000
Stamp duty: $11,000
Legal costs: $1,500
Build and pest inspection: $500
Total outlay: $43,000
Holding costs
Council rates: $2,000 p.a.
Water rates: $1,200 p.a.
Property management: $1,125 p.a. (6 per cent)
Insurance: $800 p.a.
Mortgage repayments interest only: $16,000 p.a. (6 per cent)
Total holding costs: $21,125
Income from property
$360 pw rent (6.2 per cent gross yield)
$18,720
So, based on the simple (and very achievable scenario) above. This investor could put their $50,000 deposit to work and achieve their first investment purchase at the cost of $2405 p.a. (and that’s pre-depreciations and tax incentives) ‘cash flow neutral’. Additionally, they would be keeping a buffer of $7,000. All while renting where they want to live and build wealth through property. Now if we achieved 6 per cent year-on-year capital growth for five years, that same $300,000 asset would be worth $400,000. In two to three years there would be the potential to draw $50,000 in equity and go again.
The most important aspect to this scenario is the selection of the asset (property) and the structure of your mortgage to allow you to continue to build your portfolio successfully. That’s where a good buyer's agent, mortgage broker and accountant are worth their weight in gold!
My advice, embrace the opportunities which rentvesting presents and go out there and do it!