Cayla Owins rents in Melbourne and has an investment property in regional Victoria. (ABC News: Jack Fisher)
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Have you been renting for years, feeling like buying a property is getting further and further out of reach?
Despite the recent dip in property prices, the median price in Sydney is still over a million dollars and in Melbourne, about $810,000.
But what if there was another way? For a growing number of Australians, rentvesting allows them to experience the best of both worlds — renting where they want to live and buying an investment property where they can afford.
As part of the ABC’s personal finance project, we’ve taken a look at what it takes to be a rentvestor.
Buying a house can seem impossible when you’re single
Cayla Owins loves living in Melbourne, but couldn’t afford to buy there.
So instead, the 33-year-old spent five years saving up about $35,000 for a house deposit and used it to buy an investment property in Bendigo, in regional Victoria.
She bought the house for $355,000 in 2014 and since then has continued to rent an apartment in the eastern suburbs.
“For me, working as a professional, Melbourne was where I needed to grow professionally, and personally [and affordability] was in Bendigo.”
And Ms Owins has done it all on her own — with no help from her parents.
“I’m still single and have no other interested parties in my property,” she said.
“I saved for a deposit by myself.”
Ms Owins saved slowly, cutting down expenses and using a high-interest bank account.
“I’ve never gone without treating myself either,” she said.
“If a friend said, ‘do you want to go out for dinner to celebrate a birthday’ or something, I would never be knocking back an opportunity either.
“It just meant I wasn’t going around splashing money where it wasn’t needed, so I chose what I spent my money on and spent it wisely.”
She says her dream would be to have her own place, but for the moment she’s happy.
“I enjoy this suburb and if it means I have to rent, that’s what you do,” she said.
Founder of Thalia Stanley Group Marion Mays warns investment properties don’t always make money. (Flickr: State Farm)
She chose Bendigo because she knew the area, having grown up there.
“It has good infrastructure, good public transport and so forth,” she said.
Despite it taking two months to find tenants for the property, Ms Owins says she’s been lucky enough to find people willing to rent long-term.
In the five years she’s owned the place, she’s only had two sets of tenants.
“The fear is always there — ‘what happens if I lose my job or can’t meet the repayments,’ but I haven’t had to face that day yet,” she said.
“The tenant’s rental payments meet a fair amount of the mortgage repayments and I just top it up.
“I focus on the payment first and I pay it in reverse, I pay off my mortgage and her rent comes in to subsidise my income.”
Ms Owins is paying both principal and interest on her loan, and one day she hopes to use the equity in the property to buy her own place, and ideally have a rental portfolio which would act as her nest-egg for retirement.
“I can build from here,” she said.
“My dream has started.”
Rentvesting is a growing trend
According to ABS figures, around 340,000 Australians are rentvestors, or up to 15 per cent of all private tenant households.
What do these terms mean?
Negative gearing: The practice of borrowing money to invest. If the income received from rent is less than expenses incurred, the loss can be claimed as a tax deduction
Positive gearing: It still involves borrowing money to invest. But in this case, the income received from rent is higher than your interest repayments and outgoings. So you make a profit (which might be taxed)
Capital gains tax: If you make a profit from selling your investment property — you may be subject to capital gains tax. If you own the property for more than a year the capital gain is generally discounted by 50 percent. It’s then added to your assessable income and may increase the tax you need to pay
Many are young people, who are using this strategy to get a foothold in the property market, University of NSW Professor Hal Pawson said.
Professor Pawson, who has studied the phenomenon, says rentvesting also gives people access to generous tax concessions that are only available to investors.
That includes negative gearing and the ability to offset taxable income with expenses.
“Rentvesting is attractive largely because it provides access to the tax advantages of residential property ownership and the scope to share in wealth gains from generally rising property values, even if the area where you want to live for work and lifestyle reasons is a place affordable to live in only as a tenant,” he said.
Rentvestors might also be pushing others off the property ladder
But despite the success stories, underlying the rentvesting trend are some worrying economic factors.
It appears more people are being locked out of home ownership, with the number of people in long-term private renting (for longer than 10 years) doubling since the 1990s as property prices soared, particularly in the big cities.
And income hasn’t kept up, with property costing around seven times the average salary, Thalia Stanley Group founder Marion Mays says.
“The economics of home buying is now a failed formula,” she said.
“The cost of living and wage growth are out of balance with housing prices.
“But also culturally we are seeing a trend amongst Gen Y and millennials where they want fluidity and flexibility of lifestyle.
“They don’t want to buy a house and be stuck in it for 20 years — with the advancement of technology we can work anywhere.”
TLDR, rentvesting pros and cons
- Live where you want to – flexibility
- Getting a foot in the door of the property market
- Additional income
- Tax deductions
- You still have to rent
- May miss out on the first home buyers grant
- Unlike if you buy a house to live in, you may have to pay capital gains tax when you sell
- Rental prices may fall
- Property prices may fall in the area
Dr Nicole Gurran, a housing expert from the University of Sydney, says investing in property is “part of the national psyche”.
But she warns people that investing in property hoping it will help them build wealth can be part of the problem.
Dr Gurran says rentvestors tend to purchase in lower-value markets, which increases prices in those areas and pushes someone else off the property ladder.
“It’s a symptom of a sick housing system,” she said.
“If you’re buying somewhere cheaper, you’ll be competing with people who really want to live there … so someone further down the housing system will miss out.”
‘We didn’t want to miss out on the Australian dream’
Vibhav and Shivani Sharma rent in Sydney and own eight investment properties across Australia. (Supplied: Shivani Sharma)
Sydney couple Vibhav and Shivani Sharma are among the growing number of Aussies rentvesting.
The Sharmas, who are in their late 30s/early 40s, moved to Australia from India a decade ago and work in IT support services.
They rent in Sydney’s north-western suburbs and own — wait for it — eight investment properties across Australia.
They bought the first property in Mango Hill in the outskirts of Brisbane just five years ago, for about $360,000.
“The Sydney market in 2014 was completely overheated,” Mr Sharma said.
“But we didn’t want to miss out on the Australian dream so we thought maybe we could buy something which comes into our price range somewhere else.
“From that time onwards, we’ve never looked back.
“We’ve averaged out [buying] at least two properties each year and now our price range is going a bit higher too.”
The couple, who have a young daughter, now own three properties in Queensland, three in Victoria and two in New South Wales.
They have saved up for each new deposit, except for one, where they refinanced the other properties.
The properties are all positively geared, which means the rent covers the interest and other expenses.
The couple have saved up for each new deposit, except for one where they refinanced the other properties. (Supplied: )
But they warn it takes some serious planning.
“I maintain a crazy excel spreadsheet — I do it ‘to a T,'” Mr Sharma said.
‘”Even if I’m spending $99 for an annual smoke alarm check, it will be on my spreadsheet.”
All the properties are on the outskirts of cities that the couple hope will become growth areas.
“We look for semi-metropolitan areas with good potential,” Mr Sharma explained.
“Either on the virtue of some infrastructure project the Government is investing in, or some big hospitals, or other investments that are coming that will eventually drive growth and drive the demand for housing.”
For the Sharmas, it all comes down to affordability and flexibility.
“I like to move houses every 3-4 years, get a fresh house, new surroundings, get to know the place, local coffee shops and all those things,” Ms Sharma said.
“I don’t like to anchor at this stage in time, thankfully age is on our side.
“I still want to check out a few suburbs before we circle in on a suburb, which we would like to finally settle — we haven’t reached that point yet.”
But there are still risks with buying property
Ms Mays also warns investment properties don’t always make money and investors have to be careful about how much debt they take on.
“If they’re geared at 90 per cent, all that has to happen is tenant vacancy rates increase, or interest rates lift, or there’s a change in legislation — they’re exposed,” she said.
Mr Sharma says what helps him sleep in peace is that “if one of us does not have a stable income, these properties don’t need us to support them”.
They are also paying principal and interest on all their loans.
“Unless there is a huge disruption of something at a macro level, where interest rates change very significantly — that would be a major risk for us,” he said.
With eight properties, the Sharmas are heavily exposed to the property market, although they say they have small investments in shares and bitcoin.
And they’re not worried about the possibility of paying capital gains tax either.
In fact, despite already owning eight properties, they plan to buy another seven houses in the next three or four years to take their portfolio to 15.
“I won’t say it’s become an addiction but it’s fair to say we’re bordering it,” Mr Sharma said.
“Then in about 1-15 years we might look at selling a couple of them.
“We’d use that equity to knock off and refinance a place for ourselves, which could be a very humble apartment.”
So what else should you consider?
If you’re thinking about rentvesting, you should ask yourself the following questions:
- Are you looking in the right area? Is it “up and coming” or established?
- Find out vacancy rates in the area: will it be easy to rent out?
- Can you afford to cover loan repayments if you can’t find a tenant or if there are maintenance costs?
- Be careful: investor loans generally have a higher interest rate than owner-occupier
- There could be tax implications: there are tax deductions, but you may also pay capital gains tax when you sell
- The first home owners grant may not apply
This article contains general information only. It should not be relied on as finance advice. You should obtain specific, independent professional advice from a registered financial planner in relation to your particular circumstances and issues.
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