Andrew Winter says choosing an investment property is a good solution for first time buyers - and the industry needs to catch up.
What happens if you can’t get your foot on the property ladder?
It's an increasingly common question, and that's where so-called rentvesting comes in.
Rentvesting is when a first time buyer purchases an investment property in an affordable area, but continues to rent in their preferred location.
What rentvesting is doing is addressing the fact that many people in big cities - especially young first time buyers - can’t afford to buy property where they want to live.
It’s actually a really good solution, because it:
1. Gets them into the market
2. Gives them a chance to build equity
3. Reduces temptation to use savings
The only problem with rentvesting is there’s a bit of a grey area.
Stamp duty exemptions and other benefits for first-time buyers don’t apply to investment properties in many states.
The same goes for banks and lenders offering home loans, and the fees and rates involved. They’ll ask questions if you work in Sydney but are buying a home in Queensland.
So while there may be some small tax deductions associated with an investment property - providing you make a profit - you’re likely to be paying a higher interest rate and stamp duty going in and you’ll pay higher capital gains tax when you leave.
Any slim tax write-offs aren’t much compared to the extras you’ll be paying.
You also have more expenses owning a property - rates, maintenance, strata fees, acquisition costs.
This needs to be addressed. If it is your first home and you've never bought anything in Australia before, I believe you should get the first time buyer benefits.
We should not be hard on people who choose this route. It’s a good option for many to get into the market and it means they’ll get to buy a family home further down the line - it’s setting people up for the future.
So how should you go about rentvesting?
Personally, I only ever buy investment property in areas where it’s predominantly owner-occupied. That’s obviously not always easy to do but look for somewhere where more than half of the block of units, or houses, in the area are owner-occupied.
If you’re reading an advert for a new unit block with high rental demand, the trouble is there could be 50 apartments up for rent.
Demand might be high in that area but not for 50 all at the same time. That’s the only time rents go down, with a fairly quick oversupply. Melbourne's Docklands would be a prime example of that.
Do what is comfortable for you. When you're renting you are just giving the landlord money.
But if you buy, you are giving the bank money, although you’ve got leverage with a home loan in that it allows you to partake in the profit-making.
The main thing to remember is if you aren’t in a position to buy, don't panic.
Rent something economical a bit further out and a bit smaller than you want and put the money you're saving aside. You have to be very disciplined but there are options.