Rentvesting is when you rent a property in the area you want to live in, while investing in a separate property in a location that better suits your budget.
With rentvesting, you don’t have to own your own home before investing in property, giving it wide appeal. It’s an investment strategy that is especially attractive to young people and aspirational families, who don’t want to sacrifice their lifestyle while building their future wealth.
There are potential downsides, of course. You may miss out on the first homebuyer grant, and (unlike someone owning their primary place of residence) you are subject to capital gains tax when you sell. You also become a renter and a landlord at the same time, which has its own financial considerations. You have no security of tenure in your rented home, and all the responsibilities of financing and managing your investment property.
But done well, it can mean you enter the property market and start your investment portfolio, without having to sacrifice your lifestyle to do so.
It’s also worth noting that the most successful rentvestors generally follow a strategy mapped out by experts in property investment. There are just too many variables to leave it to chance. When you consider Australia has up to 80 distinct property markets, all growing at different rates, picking your investment property with a pin is definitely a risky way to proceed.
It’s important to get professional help in building a strategy that works for your current financial situation and goals.
Here’s an overview, some examples of what rentvesting might look like and the rentvesting pros and cons.
What is Rentvesting?
Understanding the market environment will help you to ensure the rental property has a minimal vacancy rate. It is paramount to understand the type of properties people are looking to rent. Each group of people are looking for different characteristics that meet their personal needs and circumstances. We will provide some insights into these groups of how people on how they select a rental property. We also provide you insights on what you need to look at when purchasing a property when selecting a property for those people. The following groups will be investigated.
- Low Income
- Middle Income
- High Income
Whether it’s for immediate rental or later sale, there are always plenty of people around looking for Somewhere to live. So, it’s easy to think you don’t have to worry too much about your prospective tenants before buying a property.
Why does it matter?
Lower yields and higher vacancy rates! That’s why!
If the property does not suit their needs and circumstances, they’ll look elsewhere. Or they may try to force you down on rental price. So, just as with any business, you need to make sure there is a market of people out there who want what you’re selling and that they’ll be willing to pay the price you ask.
Know what your prospective rental clients
Get that wrong, and you’ll be left holding the property that too few people want to rent or buy. Low demand will reduce rental yields and capital growth.
So, before you buy any rental investment property, you have to know your
- Potential target market
- What they might be willing to pay for it,
- The demand for properties
- The level of competition there is from other investors
- Rental market.
When you know all of this, you can buy with far greater confidence knowing you will have a property that people want.
Student Rental Requirements
Students are a prime rental market. They are less selective about where they live than many other groups because they generally want to pay the lowest rent possible.
So, while they would love to live in a well-appointed large house with all the latest appliances and great amenities nearby, they usually can’t afford to.
However, that doesn’t mean that they won’t expect the property in which they live to be sound and well maintained.
As students, you know they’ll most likely be boisterous tenants have lots of friends around, play loud music and have parties, all of which means you can expect heavy-duty wear and tear and probably quite a few breakages.
Uni students also often vacate at the end of the academic year, leaving the property empty for three months.
For them, low-cost units are one option, but they often prefer the idea of a house share with friends, with each having their room, a communal living area and splitting the monthly bills between them. Ideally, they want to be close to uni and nightlife but may have to compromise on one or the other. And as many of them won’t have cars, good transport links to and from town and uni are essential.
The quality finishes in the property are less critical, along with the décor.
Lower Income Rental Properties
Lower-income families are also on a budget but may need extra space for children in additional bedrooms or outside areas where children can play.
They’ll also be interested in having schools and childcare facilities nearby.
Typically they will need to be close to public transport with good links to town and local amenities.
Higher Income Rental Properties
Those with higher incomes, professional individuals and couples can range from those just starting their careers to the more established who are already on decent money. In this bracket, the groups will vary considerably depending on their age, family and career circumstances.
Their needs vary from mid-range accommodation, including houses that they can share with colleagues and old university friends through the top end apartments with high-quality fixtures and fittings.
Most young high-income professionals will want to live close to the city centre. Statistically, they tend not to stay in the same rental for extended periods. They tend to try different suburbs or buy their property. Some professionals may also have their accommodation organised for them through corporate lets. This is where companies and organisations that bring in staff on a contract basis rent a house or apartment long term to accommodate them.
Those companies who provide accommodation for their staff do it for a reason. To keep them within the company as they are seen as a valuable asset. For that reason, companies want to impress the staff, so the rental property expectation will be a high-quality, impressive fixture, fittings and furniture. The professional market is most relevant and vital in large cities where there is a strong business culture. But smaller cities can see a sudden influx of professionals brought in by the building of large new infrastructure projects or the arrival of a significant company in the area.
Does Location Matters
The building of a new and larger hospital can also see a sudden change in the pattern of rentals as doctors and support staff arrive to take up new posts. If you think in terms of nurses and relatively junior doctors, then lower-cost units and apartments that require little upkeep will be attractive to them, as long as they’re close to the hospital itself.
Middle to High Income Family Rental Properties
Middle to high-income couples and families are generally likely to want to buy their own homes. There are many circumstances in which they will choose to rent. For instance, they are between properties having sold their previous home but not been unable to move into their new purchase or are still looking for the right home to buy.
In this situation, they may decide to bridge the ownership gap by moving into a rental for six months. Again, this is a group that is used to high-quality fixtures and fittings and more willing to pay a higher rental.
Rentvesting can help you find the right time to buy a real estate investment property to enable to build equity, to enable you to purchase a home.
So, while they may be willing to compromise to some extent on the internal layout because this won’t be their permanent home, they will expect a certain standard. For example, they will almost certainly be car owners. They will need a garage to park their car.Many people are precious about having their car in a garage. If they have a family, they will need good transport links to get to school and other activities.
Being close to schools is also critical! It is common practice for people to move closer to school for their children’s needs. It is not unheard of people renting out the initial property and moving to a rental property close to a school just for the children’s education. And if they like the property enough, this type of renter may offer to buy the home they’ve grown used to and make you an offer as they come to the end of their tenancy agreement.
Find out your borrow capacity
Middle to High-Income Family Rental Properties Job Relocations
It is common practice for families to move for work. For example, Military people often move to rental properties every two years. When new industrial sites have or have just been built, this would attract people to relocate.
In these circumstances, middle to high-income couples and families will likely move into the area to take a new job or position. They will want good quality homes not too far from the work location. Often they want to get to know the area by renting before committing to a purchase.
Downsizing and change of lifestyles
When some people in life reach a stage of life, they will look for smaller properties. Their children have moved out, and the need for a large home is more of a hindrance and a pleasure.
They’re still active and fit. And while not wanting big nights on the town, they still want access to good restaurants, theatres, and galleries.
There has been a growing trend for those people to rent the ‘family’ home and use the rent to rent another property fitting to their lifestyle. They use this as an interim measure before moving into a retirement village.
Some are even selling the family home, downplaying space in a retirement village, and renting in the interim before moving to the village and using the extra cash to enjoy life.
Matching Property Investment with Rental Requirements
The sheer diversity of potential renters and purchasers demonstrates how essential it is to match your properties with potential clients. Each of these groups has specific needs that particular property types in specific locations can only meet. So, being aware of these is crucial to ensure your property portfolio is working to your best advantage.
If you’re renovating an investment property, installing new appliances, kitchens and bathrooms and changing the decor, knowing your target market is crucial to avoid making expensive mistakes. Don’t, for example, put costly fixtures and fittings into a property that you plan to let out to students or put cheap fixtures and fittings into a property that you want to let out at a premium rent to high-income professionals.
With the property market in constant ebb and flow, it makes sense to diversify your portfolio to allow you to cater to more than one group. And of course, the more groups who are attracted to a type of property, the more likely it is you’ll be able to rent it out continuously long term.
So, with this in mind, it’s time to think about buying your property.