Are you saving for your first home but have become priced out of the housing market?
If you rent in Sydney or Melbourne you might be thinking that you can never afford to purchase your own home. Prices in Australia’s biggest two cities have gone through the roof in the last few years and many first home buyers are struggling to get onto the property ladder. Until the market cools down and your wages or savings grow, Sydney and Melbourne could be out of reach for some time. So what option do you have to realise the great Australian dream of home ownership?
Get onto the ladder by Rentvesting…
It’s the new buzz word around town but it’s not a new strategy, so what does it mean?
Rentvesting simply means rent where you want to live and invest where you can afford to buy.
This alternative strategy can allow you to continue renting a place in the location that you love without having to move further out of the city, or putting yourself under the financial stress of a huge mortgage. Using the deposit you already have, you can invest in a more affordable location and still be a property owner.
Values growing faster than rents
With home values growing much faster than rents in Sydney and Melbourne it is now much cheaper to rent than buy the equivalent home. Let’s look at an example to demonstrate this:
A 2 bedroom unit in Cremorne rents for around $650 per week but might cost $940,000 to buy.
With variable interest rates at around 4.5% the repayments on an 80% loan would be at least $880 per week if you were to buy the same unit.
You also need to factor in all the other expenses of owning your own home which you don’t pay as a tenant.
Also remember that all costs associated with an owner occupied home are non-deductible, whereas expenses related to an investment property may come with tax deductions.
If you rent you might be helping your landlord pay off their mortgage but your tenants will be paying off yours.
Renting is not dead money (as long as you also invest)
I appreciate that not everyone likes renting, as you can’t always make personal changes to the property and you might have to move every year or two. On the positive side it gives you flexibility to decide where you live and choose your budget if your circumstances change. Renting shouldn’t be viewed as a negative or just dead money, as long as you use your savings to invest elsewhere.
Rentvesting allows you to purchase into a different market that you can afford and still take advantage of future capital growth , creating long term wealth for yourself. Also, by investing elsewhere you open yourself up to all the property markets in Australia. Therefore you have the opportunity to buy in an area that is primed for future growth rather than an area that’s already seen its boom period.
You might also find that without the burden of a hefty loan from an owner occupied property, it gives you a greater capacity to invest into more than one investment property. This allows you to build a multiple property portfolio quicker and reap the rewards sooner. If you then gain equity in your investment properties over time, you can always use that equity to purchase your dream home in a better location in the future.
Get into the market sooner
Rentvesting can be a great strategy to get into the property market sooner and still live in your preferred location now. It really comes down to your savings, cash flow and where you really want to live. Compare the numbers on both options and make a more informed decision before you jump on to the ladder.
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