House prices continue to rise across Australia, particularly in some of the major cities, effectively locking many young couples out of the suburbs they would like to live in. They then feel that they either have to give up their dreams of home ownership, or buy and live somewhere that may not suit their lifestyle.
But what if we told you that you could have your cake and eat it too? That you could live in the suburb you want and still buy a property.
The answer lies outside of the box, with a concept called rent-vesting. That’s where you rent in the suburb you want to live in but buy an investment property that fits your budget.
While it may seem like a backwards approach, it’s actually not as silly as it sounds. Rent-vesting allows young couples to get their foot on the property ladder without giving up their lifestyle, which in turn allows them to start building personal wealth sooner.
So how does it work?
Well, if we take Sandy Bay as an example. According to realestate.com.au, the median house price as at 25 July 2016 was $690,000. To avoid complicating the calculation with Lenders’ Mortgage Insurance costs and stamp duty, let’s assume you have 20% deposit. That’s $138,000, meaning you’d need a home loan of $552,000. If you borrow that amount at an interest rate of 3.99% p.a. on a 25-year loan, your monthly repayment amount would be $2,910.61.
Now, let’s compare that with the cost of renting a property in Sandy Bay. According to the same data, the median rental price is $2005 per month.
That’s $905 a month you would have to invest in property elsewhere – not to mention the $138,000 you wouldn’t have spent on a deposit in Sandy Bay. This strategy may allow you to buy several cheaper investment properties that could potentially build your wealth quicker than buying one more expensive home.
However, the downside is that you are at the mercy of your own landlord, and could be asked to move on their timetable.
The figures change dramatically if you’re living in Melbourne or Sydney, where the median house prices are so much more expensive.
As with any investment strategy, you need to do your research and work out if the numbers make sense for you.
You can talk to a lender or financial planner by calling 138 001.