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Would-be first home buyers who are disheartened by Australia’s soaring property market have been advised to look outside the main capital cities. But that often means kicking in a steady job and leaving friends and family behind.
It’s no wonder that the property strategy known as ‘rent-vesting’ – continuing to rent while you buy an investment property – is becoming more popular.
For Melbourne-based digital consultant, lifestyle blogger and jewellery designer Emilia Rossi, rent-vesting was the obvious way to afford her first home, which she bought at 25.
Ten years on and Emilia and her partner rent an apartment in Melbourne’s trendy Docklands area – and Emilia is now in a financial position to pay off not one but four investment properties.
So why are Aussies like Emilia turning to this investment strategy as an alternative to entering the property market?
Across Australia, the median home price is around $670,000; but what about those living in pricier states? Melbourne home buyers, for example, have to contend with a median price of around $800,000 for houses in the metro area and around $1.5 million in the inner city.
Pulling together the 10% deposit for a $900,000 property plus costs (typically 5%) could take even the most determined saver years. This is where rent-vesting can provide a very practical path to buy your way into the residential property market sooner.
For example, if you buy in a regional area at half the average cost of inner-city homes and then rent out the property, you have a foot in the property market in half the time. As a bonus, by continuing to rent you can live where you want in the meantime.
For Emilia, she can’t stress enough the importance of planning your rent-vesting strategy as early as possible.
“I lived with my mother in Canberra when I graduated from university and saved to buy my first unit in a Canberra apartment block,” she says.
Emilia bought a two-bedroom apartment in a small complex that had no elevator or pool, so body corporate fees were low, and the popular location was close to public transport.
She says that being able to work and live at home for a while really helped her start off. While not everyone has this support when saving for an investment property, there are certain spending sacrifices we can all make.
“I had to make sacrifices. I didn't buy expensive things such as holidays or a car, but still had enough money to go out and have fun.”
Emilia tracked every dollar she earned and spent via a budget spreadsheet. This ultimately allowed her to save steadily and invest that money back into her property portfolio.
After quitting her “cushy full-time job” to start a business and move to Melbourne, Emilia saved enough to buy two more apartments, both in the Victorian capital.
“I didn’t really pay much attention to capital gains for the second and third properties that I purchased, which would have allowed me to refinance the fourth property a lot sooner by drawing equity.”
Emilia and her partner purchased their fourth property with the aim of increasing capital gains rather than looking for rising rents.
Emilia says she only agrees to let her properties under six-month leases so she can easily negotiate rents and management fees to maximise her profit.
“Two or three of my properties are also negatively geared, so the rent earned doesn’t cover all of the expenses such as the mortgage, agent fees and maintenance bills.”
She says that negative gearing – owning an income-generating investment property that earns less rent than the total cost of owning it – actually helps reduce her income tax.
While negative gearing can be beneficial in the short term to offset tax deductions, it’s wise to talk to a financial planner to ensure your investment portfolio remains profitable.
As a tenant herself, Emilia has learnt the benefits of living minimally so she has the flexibility to easily move around if she desires.
“We don’t have a lot of stuff, we’re pretty minimalist and live very lean in terms of the things that we've collected.”
But at 35, Emilia admits she’s now attracted to more stable housing.
Emilia and her partner only moved into their current apartment recently, but she says she's becoming more strategic as a tenant, and recommends negotiating longer leases of 12 to 24 months so you can keep ahead of rent increases.
“I look for places that haven’t been rented out before, in mostly owner-occupied blocks.”
Emilia calls herself an aggressive investor and says that while there have been times she's been quite financially exposed, she's spread her risk across several properties and income streams to ensure some protection.
She also acknowledges that some investment property risks are simply out of our control – such as laws around negative gearing, rising interest rates or falling rents.
“When something unexpected like that happens, it just means taking a step back and restructuring something else in your life – drop your spending, make a change."
She says potential rent-vestors should have clear financial objectives that stretch a number of years ahead.
“Starting young, at 25, gave me lots of opportunities to make mistakes. But it’s more difficult to take those risks for people with a lot of responsibilities like a full-time job or supporting a family.”
Ultimately, Emilia says the biggest advantage of rent-vesting comes from having the financial freedom to afford the rent in your preferred area.
“If you want the convenience of living in a major city, you can actually be better off to pay the rent than to pay the interest on the mortgage that you would need to buy a place.”
Emilia says there are many people involved in the rent-vesting movement who employ varying strategies when it comes to where they rent and where they buy. There’s no one ‘right’ way to do it. As long as you plan each move carefully and consider the potential risks, it falls on your shoulders to find a strategy that works for you.
As Emilia puts it: “rent-vesting is definitely something where you need to work out your own path.”