Traditionally the word ‘landlord’ conjures mental images of loafer wearing, silver-haired moguls who spend their days at the country club when not jet-setting business class around the globe.
Which makes it sort of ironic to think that many of today’s ‘landlords’ have more in common with their tenants, than they do with what we might think a traditional property investor should look like.
In fact, around 30% of Australian property investors are renters themselves. In recent years this trend has been labeled “Reinvesting”.
Now initially it may not seem to make sense. Why would anyone choose to rent when they can obviously afford to buy a property – and enjoy the perks that come with living in your own home?
Putting Lifestyle Fist
Contrary to what we might think, rentvestors choose to rent because they put lifestyle first. They want the freedom to live in a community they love or a premium location, close to their favorite shopping strips, friends and work. It is much more cost-effective to rent in a blue-chip suburb than it is to buy in the same suburb.
For example, to rent a 3-bedroom home in Bondi, NSW costs $1,250 per week. To buy a 3-bedroom house would cost $2.7 million which equates to $2,175 per week – plus council fees and maintenance, etc. It makes better financial sense to rent.
Rentvestors also value the flexibility that renting provides. They know that they can follow their career wherever it takes them – without being restricted to working within a 50km radius of a postcode.
Yes, there are some downsides, like not being able to choose the choice of flooring or paint – but if it doesn’t take your fancy, then there are plenty of other rentals to choose from.
With homes costing 10x the average annual income owning their own home seems like an unattainable dream for many young Australians. However not all properties are out of reach.
Renovators typically invest in more affordable entry-level properties in the suburban fringes or compact apartments and units in urban areas.
Typically, properties like this can cost anywhere from $250,000 to $500,000 and usually generate a positive cash flow from the rent received.
By choosing to buy properties that are priced 30% – 50% lower than the average family home means that renovators can get a foothold on the property ladder sooner.
And maybe one day they too can escape the rent trap for good as well. All the time spent while rentvesting is time spent growing equity. This equity can one day become the deposit for their own home.
How to Rentvest Successfully
Any type of property investing is not always going to be smooth sailing. Before you rentvest you need to be well prepared and know exactly what kind of property you need.
For many people, one property will not be enough, and they will look to buy several properties in order to leverage their money and create wealth for the future. In order to purchase many properties, they need to all have a strong cash flow so that you can service your loans.
The more properties you can hold onto through a real estate growth cycle (a doubling phase) which is usually between 7-8 years, then the wealthier you will be on the other side.
Some people may not want to wait that long and will look for properties where they can generate chunks of equity fast through subdivisions or developments. However, these investments tend to be harder to finance and the investor must be sure what to expect.
Whatever your approach, you need to understand where you stand financially, where you want to be in the future and what properties support these goals.
Steps Towards Reinvesting
1. Save a deposit
This is undoubtedly the hardest step because when prices are on the increase, lending requirements get tighter.
Aim to save 20% of the value of the property as a deposit. Start with a property that has a lower value than you would consider as a home to live in for purchase.
2. Find the property
Make sure to consult a team of experienced professionals who can guide you towards making the best decision. A buyer’s agent, mortgage broker, accountant and property manager will be your best friends. Before you buy anything, make sure to do due diligence on the property and negotiate the best price.
3. Work on your next property
Once you purchase the property, make any necessary improvements to increase its value and rental return. A cost-effective cosmetic renovation usually needs no more than a lick of paint and changing outdated fittings like door handles and lights for more modern options. Simple, quick and cheap fixes like this can add big dollars to your bottom line.
Rent out your property and watch the market, then once you have enough combined savings and equity use it to buy your next property.
4. Buy the next property
Before you buy your next property it’s time to reevaluate the market, your position, and your strategy. Maybe now is the time to take on more ambitious projects like a major renovation, development or subdivision? Although it’s a bit more work and cost up-front, the profits on the other side are much more rewarding. A buyer’s agent will be able to guide you in the right direction.
5. Consolidate your portfolio
After a certain amount of time in the market, your properties would have grown in value. After 6-8 years you can expect the property to have doubled in price. If you have several properties, they may all have doubled in price.
This gives you excellent opportunities to sell some properties and pay down debt on the others – and be mortgage-free while continuing to enjoy the income your investment property provides.
Alternately, you can hold onto the properties and use the equity as a deposit for your own home. Either way, you have many more options than if you just rented and never bought any property.