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This is what first home owners need to do to get into their dream homes

Under current market conditions, purchasing a home in idealistic locations can prove quite tricky, especially for first home buyers.

Rentvesting is becoming increasingly popular and is proving to live up to expectations. It is a great strategy for first home buyers looking to get into the market when they just don’t have the budget to buy their dream home. So, they invest in more affordable markets and rent where they like to live while their investment is working for them to build up their deposit power. For example, one young couple I’ve worked with, Tara and Martin, lived in Sydney’s expensive Inner West but could not afford to buy their $1.5 million dream terrace where their repayments would have been more than $6000 per month. So, they adopted rentvesting and continued to rent in the Inner West for $550 a week.

They then strategically invested in Dapto and Adelaide where both property purchases were under $400,000.

In three years, they made just under $300,000 in equity which will go to their deposit power back in Sydney when the time is right. If purchasing your dream home lead to mortgage repayments $5,000 a month, but renting in the same area had rental repayments of $2,500 a month, you would be left with $2,500 per month to invest. To get started as a rentvester, firstly, you must get access to a deposit (as you would if you were purchasing their dream home).

The deposit can be obtained by savings or using your parent’s equity through parent pledge type structures. You’ll need 20 per cent of the purchase price, plus stamp duty. It’s best to speak with a broker about the options and exact figures for how much is needed. Next, it’s crucial to set a budget for buying and development an investment strategy, either yourself or with the help of a buyer’s agent. When selecting a buyer’s agent, avoid the spruikers and cowboys of the industry by only working with firms who do not take kickbacks or buy off the plan. Finally, you’ll need to pick your market. The best thing to look out for here is a market positioned for good growth in the first 3-5 years so you can build deposit power. Look for areas driven by infrastructure, rental demand, employment and population growth.

My team like to look at areas down around South Adelaide such as Woodcroft and Morphettvale where there are markets you can buy in for under $400,000. The Suburbanite team also look towards Flynn, in the ACT, which is gentrifying and starting to go through the urban renewal process. What happens after selecting your market and purchasing a property for rentvesting? It’s important to be patient while the value of the property increases with the market and remember to pay down as much extra off the loan as you can so you can build your equity even faster. Once you have a good amount of equity, you can sell it to cash out of leverage it to buy your own home. Some rentvesters will even do this 2-3 times before cashing out and buying their own home to really double down on their deposit power. Successful rentvesting doesn’t come easy. Here are my top tips to successfully rent-vesting:

  • It HAS to be a growth market driven by employment, infrastructure and population growth

  • Avoid new or off the plan as they have lending risks, are slower to grow in value and can be at risk of over supply

  • Don’t be tempted to sell the property too soon, 12 months is not long enough to build equity in the property market and you typically need to work on a 3-5 year strategy. So be patient...

Source: The Real Estate Conversation 12th June 2019

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