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As interest rates decrease and buying power strengthens, many young Australians are looking at rentvesting to get a foot on the property ladder.
Growing in popularity as an investment strategy, rentvesting is when property buyers rent in the cities where they want to live and work, and then invest in property in regional or rural markets which have the potential for wealth creation.
“One of the advantages of rentvesting is the opportunity for people to rent in areas that they typically wouldn’t be able to afford to buy in, given rent is usually more affordable than mortgage repayments in expensive suburbs,” Nicola McDougall, the chair of the Property Investment Professionals of Australia (PIPA), tells AC.
“Also, the ability to include rental income in serviceability calculations can make financing more achievable – especially for young people who are purchasing their first properties.”
Yet Nicola advises rentvesting needs careful consideration and planning.
“Rentvesting has grown in popularity over the past decade, however, low vacancy rates means that the strategy may not provide the same level of housing security that is available to owner-occupiers,” she says. Nevertheless, the Great Southern Bank’s No Place Like Home report shows 34 per cent of millennials and 36 per cent of Gen Z plan to purchase an investment property within the next three years.
“In order to achieve home ownership, younger generations are showing remarkable resilience and creativity,” says Great Southern Bank COO Rolf Stromsoe.
“More than any other demographic, they’re looking for investment opportunities in property. ‘‘‘Generation Rent’ is also adopting some clever, realistic strategies like leaning on family for support or opting for a more modest property in order to secure their future home.”
According to Westpac’s annual Home Ownership Report, more than half (54 per cent) of first-home buyers are considering the rentvesting option and 82 per cent of buyers are open to purchasing in an area they haven’t originally considered.
“Interest rates are almost certainly having an influence here,” says Westpac’s Senior Economist Matthew Hassan.
“For rentvestors, the rate moves bode well for increased buying power.”
However, they’re still at the “pointy end of the affordability problems in Australia and becoming a first-time buyer is the hardest step of entering the market.”
“Rentvesting offers an alternative pathway that allows people to manage some of the financial risks that are involved with becoming a first-time buyer, while also sort of balancing lifestyle arrangements,” Hassan says.
The Westpac report shows NSW is leading the way as the rentvesting capital of Australia, with 61 per cent considering rentvesting in the state, followed by Victoria at 54 per cent, and Queensland at 52 per cent. In Brisbane, the race is on for investors to buy a slice of the Olympic city before the 2032 Games, with a Finder survey showing seven per cent of the Australian population – about 1.5 million people – want to buy into the Queensland capital.
Westpac also found many aspiring homeowners are looking to buy sooner with 13 per cent wanting to purchase a new home by the end of this year, compared with 10 per cent in 2024.
Research from CoreLogic shows rentvesting could potentially pay handsome dividends, with the combined regions outperforming the combined Australian capital cities by 18 per cent over the past five years, while top-performing regions have lifted by up to 100 per cent.
§ RENTVESTING IN THE REAL WORLD
When self-employed plumber Peter Holmwood left his job in the navy he decided to use his superannuation to invest in property but he realised he couldn’t afford to buy in Sydney.
“To purchase property around where I live is near impossible for me, so the rentvesting thing is a good thing because you can reside where you wish to reside and purchase elsewhere,” says Peter, who lives in his family home on Sydney’s lower north shore with his mother and his partner.
“So I’m living my life where I want to live it and yet I’ve got a block of dirt that I’m paying off elsewhere.”
That “block of dirt” is actually a two-bedroom apartment on the 68th floor of a 100-storey high rise in Brisbane, which Peter bought off the plan in 2018 after doing “plenty of homework”. “At the time Brisbane was pitching for the Olympics and I thought it was a good idea to invest there as a long-term goal,” he says.
The estimated rental returns and projected 80 per cent growth in the property’s value over a 20 to 25-year period were enough to convince Peter to sign on the dotted line.
“I’m currently renting the property out fully furnished to long-term renters because I want to avoid the wear and tear which happens with short-term rentals like Airbnb,” he says.
Peter, who makes about $4,600 a month from his rentvestment, says working for himself makes it easier to structure his finances. “I pay myself a minimal wage and I let the company pay everything else,” he explains. “Paying myself a low wage means I can offset it with my income from the Brisbane property so I don’t fly into too high a tax bracket.” Peter cautions would-be rentvesters to research the property’s outgoings before buying. His strata fees alone are about $3,300 per quarter because of ongoing lift maintenance in his 110-storey block.
In the past, Peter rentvested with his mother in an apartment in the Sydney beachside suburb of Cronulla. “We had that property for about 11 years and it doubled in price,” he says. “We had to pay a bomb in capital gains and that hurt, but it was still a good result.”
Peter says he intends to rentvest in another Queensland property to add to his portfolio, and he hopes his new investment will eventually become his home when he retires.