Is "rentvesting" right for me?

A "rentvestor" is someone who rents a property to live in while simultaneously owning one or more investment properties. Instead of buying a home to live in, they choose to rent in a location that suits their lifestyle (like a more upmarket suburb or one closer to work), while investing in properties in areas where they see better financial returns or are more affordable. This strategy allows them to build wealth through property while enjoying the flexibility and convenience of renting in a preferred area.

Whilst it’s a cringeworthy portmanteau, rentvesting can be a good way to get a foot on the wealth creation ladder.

To decide if it’s an approach worth considering for your circumstances, consider the following:

• Does property investment align with your financial goals?

• Is the area you want to purchase in not suitable for your lifestyle or investment return requirements?

• Can you afford to purchase in the area you would like to live?

• What’s your priorities in terms of your living situation? Are you looking for flexibility or stability?

If you would like some guidance and advice, we would love to hear from you!

Case study – purchase of first investment property

Eliza and Mark are a young couple I have known since helping them with their first home purchase in 2017.  They are both keen on creating wealth through property, having been inspired by Eliza’s parents who retired early thanks to building a six-property-strong investment portfolio. 

In the four years since buying for $700,000, Eliza and Mark have managed to increase the value of their Campsie home to close to $1m.  The increase is thanks to a combination of capital growth and home improvements.  Eliza and Mark have spent their spare time on restoration and renovations.  They have managed to chip a fair bit off the mortgage at the same time, reducing the loan from $650,000 to $600,000.  This is how they used their equity to by an investment:

1. They refinanced their home and freed up some of the accumulated equity, accessing an extra $150k on top of the existing $600k loan, increasing the loan to $750k

2. They bought an apartment in nearby Canterbury for $600k, and used the $150k withdrawn from their owner occupied loan for a 20% deposit, stamp duty, and costs

Their new situation looks like this:

1. The family home valued at $1m with a loan of $750,000

2. An investment property valued at $600,000 with a loan of $480,000, earning rent of $420 per week

3. The repayments on their interest only investment loan are $340 per week, meaning that the loan repayments and most of the ongoing costs are covered by the rental income

How to speed up your home loan approval

There's no straightforward answer to the question "how long will it take to get my loan approved".  Every application is unique, so the time between your first contact with your bank or broker and approval can never be predetermined. There are, however, some things you can do to help hurry your application along.

A best case scenario for loan approval is usually two or three days.  When the client’s lending position is fairly straightforward in terms of employment, asset and liability position, along with a lower LVR, it's more likely to be a quick assessment.  If there is some complexity in employment status, property type, or loan structure this will often cause time frames to increase.  Also, if the lender has a promotion or particularly good offers on the market this can mean they're busy and therefore slower.  We are also seeing lenders ask for additional information more frequently in recent times, and this creates a to and fro which can extend approval time.  

Disclose all information

To reduce the likelihood of back and forth requests, which can delay your application, ensure your lender has a thorough understanding of you as an applicant including appropriate identification of all borrowers. Provide all the supporting and necessary documents upfront to your broker, and convey as much detail as possible in relation to your requirements and objectives and have good, current information on your financial position. The broker will need to not only have your full financial details but will also need to take reasonable steps to verify it.

Skip the valuation queue

Not all applications require a valuation, depending on the property and lending institution, and forgoing this step can save a considerable amount of time. You can also save time by having a valuation completed prior to your application, as long as it’s accepted by your chosen lender – but check with us first.

To ensure your application avoids any unnecessary delays, speak to us. 

How to get the best return on an investment property

When purchasing an investment property, there are several factors that could increase or reduce your potential return on investment. In this case it's not just location, location, location. 

When considering a property for investment purposes, the most important question to ask is 'will be attractive to tenants?'.  But how do you know what will appeal to someone you've never met? Settling on a handful of locations is a good start. Young families and couples are the ones that drive capital growth and so a location that is within a reasonable distance to schools, entertainment, transport, and an employment hub is one to look out for.  Other ideal factors are a low vacancy rate and relatively high rental yield.

Although location plays a major role, it's by no means the only defining factor. There is a mistruth a lot of people subscribe to when buying investment properties which is to disregard the quality because you don’t have to live in it.  You should buy a homeowner quality property, because someone has to live in it, and when buying an investment property, you must have an exit strategy, which will generally involve selling to homeowners as well as investors.

To get the most value, you need to think about the demographic of renters who are likely to be living in the area. You should match the property with the area.  If you buy a good quality, decent sized, one bedroom apartment in the inner city, it would be a great investment, however if you put it 40km out, it won’t garner as much interest.

When investing in any kind of property, be wary of any danger signs. One of the biggest mistakes Australians make is not knowing what their cash flow is.  Bad cash flow is worse than paying too much for the property.  It is vital to know how much your chosen property is going to cost after tax, every week after you settle. There’s no point in buying a top-quality property if it’s going to send you broke.

When looking to purchase an investment property, ensure the expert you are dealing with is actually an expert. Everyone has an opinion on property.  Blackwattle Finance can connect you with trusted professionals in our network.  As well as speaking to a real estate expert, speak to Blackwattle Finance for our insights on the market. 
 

Rules of Investment

When you’re trying to secure finance for an investment property, it’s important to keep a few simple rules in mind to make sure you get the best deal possible and will be able to afford the repayments, come what may.

If you’re thinking about purchasing an investment property, it’s important to manage the risks adequately. For example, you shouldn’t rely on rental returns as a guaranteed income to meet loan repayments, as there are times when a property may be vacant or hard to fill immediately and some months the rental return on a property may be diminished by maintenance costs. 

Blackwattle Finance can help you find the right product, and ensure you can afford the repayments.  We factor in things like rate rises to make sure you can still make repayments if, or when, mortgage rates go up.

Most investors will already have put some thought into where they would like to invest and will have an approximate price-range in mind. While a loan calculator is a great resource to start out with, a finance broker can use their expert knowledge to sense-check and flesh out your plans.

With access to property data and trend analyses like RP Data’s, Blackwattle Finance can pull property reports for you, detailing how the area has performed in the past as an investment, the average median house price or rate of return and how much the property values have increased over the past five or six years. These are details that investors generally can’t access.

Get in touch with us now to learn more.  Our market knowledge and experience can help you get an edge when choosing your next investment property. 

Property Investment on a Lower Income

While you may not need a six-figure salary to invest in property, those who earn a relatively low income will have to get a little more creative to start a portfolio. Here are some tips to help you get started.

Find an investor-friendly loan
The challenge for low-income earners is the time taken to save for a sufficient deposit. Some lenders require a higher deposit for an investor than is required for an owner-occupier, so seek out a lender and loan that is investor friendly, or consider living in the property for a period after the purchase before converting it into an investment property as your portfolio grows. 

In any case, having at least 10 per cent of the property’s purchase price as a deposit will not only increase the likelihood of loan approval, it will also increase your borrowing capacity and lower the risk that you will have to pay lenders’ mortgage insurance (LMI).

Prove your financial discipline
Your lower income on an application can be offset by proving yourself a low risk borrower. Having genuine savings will not only highlight to lenders your ability to consistently meet financial payments and live within your means, it is also an opportunity to increase your borrowing power. The same can be said for lowering any existing debts.

You should pay off any car loans or personal loans before applying for an investment loan if you can.  Also, keep your credit card limits as low as is practical as loan servicing is calculated on the limit rather than the balance.  

Choose the right property
When it comes to choosing the property, low-income earners will generally do well to steer clear of anything that’s negatively geared, as you are not trying to offset your high income with losses, and remember the importance of profit over property. 

Regional areas might be a good option as properties are generally cheaper to purchase and there are often better rental yields than in capital cities.  There has also been good capital growth in regional NSW in recent times.  

Seek out different strategies
Investing with a close friend or relative is another way to enter the market for those who earn a low income. As long as agreements are in place, including who is responsible for the mortgage and what happens if one owner defaults, how the property will be used, in what circumstances it may be sold, and how maintenance will be paid for, co-ownership is preferable not owning a property at all.

Find the right loan
There has been recent research suggesting that as many as 60 per cent of applicants who are rejected by the major banks would be eligible for a loan through a specialist lender. Specialist or non-conforming loans do carry higher interest as a rule, to account for the higher perceived risk the lender is taking, but this type of loan can be a stepping-stone to a prime loan, and it’s often possible to switch to a prime loan after a year or so.

Property investment may be slightly trickier for low-income earners, but in most cases is accessible provided the right properties and finance products are sought out. Contact us to find out more