The term ‘rentvesting’ may not be one the average New Zealander is familiar with, but it will be soon- especially if you’re looking to enter the property market.
In recent years, the average price of real estate in major cities like Auckland and Tauranga has skyrocketed, passing the million-dollar mark. Unsurprisingly, this is also where most people want to live.
Until now, the general way to buy property in a major New Zealand city was just to buy in a cheaper area. But with rentvesting, the game has changed. Renters can first buy and build equity in a tenant-occupied investment property in a less expensive location. Then after they have built up long-term equity (and hopefully capital gains) in their investment property, they leverage it to buy a home in a location they want to stay in or move to.
What's the meaning of rentvesting?
Rentvesting is a home buying strategy that allows you to rent where you want to live, while buying where you can afford. The ultimate goal is to use the equity and capital gains in your investment property to afford a home in the more expensive location you want to live in. Rentvesting can be a strategy for people who can’t afford to buy their own home in the location they want.
But isn’t rent money dead money?
People tend to think this, but rentvesting challenges that assumption. The traditional strategy was to buy your own home first, then buy an investment property. This model worked for previous generations, but many younger Kiwis today can’t afford to buy in the city where their job is. Because of the increasing cost of living, they struggle to accumulate enough savings. So, what do you do if you don’t want to have flatmates forever, but can’t afford to buy? Rentvest.
The point of rentvesting is to provide a shortcut to home ownership in an area that at first seems financially out of reach. It’s a way to take advantage of the discrepancies in New Zealand real estate prices, instead of just accepting that you may never achieve the Kiwi dream.
How does rentvesting work?
- The rentvestor rents where they wish to live (this may be in New Zealand or overseas). They save for a deposit on a New Zealand investment property in an affordable but promising location (you can read more about the property buying process here).
- The rentvestor rents out their investment property, collecting monthly rent from tenants while also continuing to pay rent for the place they actually live in. The tenant’s payments may cover the mortgage, rates, taxes, insurance, property management and maintenance costs.
- The rentvestor builds up equity in their investment property. They can then use it to make a deposit on a home they want to live in, or to get another investment property.
Alternatively, if the rentvestor chooses to keep their investment property, they can keep collecting rental income from it to help with living expenses, or to save for retirement. Some rentvestors plan on eventually moving into their investment property or passing it down to their loved ones. In either case, it’s important to ensure the property is within your means and is rent-ready if you live far away.
In a nutshell, with rentvesting, you rent where you want to live. You then get your first home in a less expensive location and rent out to tenants. After building up equity in your investment property, you can have the option to use the equity to buy a home in a location you want to live in. So, what are the pros and cons?
Pros and cons of rentvesting
Pros:
- Your tenant’s rent helps repay your home loan.
- You are building equity without significantly cutting down on living expenses, moving or sacrificing your quality of life.
- Property is a tangible asset that almost always grows in value.
- If you’re still renting, you can move around wherever you want and keep building equity in your investment property.
Cons:
- You can’t use government home loan benefits for an investment property deposit.
- If you buy an investment property that remains empty for any period, you will have to pay the mortgage and all other associated homeowner costs yourself.
- If your property needs a lot of work, or if it needs work done to make it compliant with the Healthy Homes standards, you’ll have to pay and ensure it gets done, which can be difficult if you don’t live in the area.
- If your landlord asks you to move out of the rental you live in, you can’t just move into your investment property; you still need to give 63 days’ notice to your tenants.
Is rentvesting possible for lower income earners?
Yes, rentvesting is possible for lower income earners. Many Kiwis have flatmates to reduce living costs in expensive cities. They may not be able to buy a home in that city, but with the right budgeting plan, they may be able to save up enough for a deposit on an investment property elsewhere.
That said, lower income earners need to be careful not to outstrip their finances if they intend on remaining in a city with a much higher cost of living that continues rising. The cardinal rule of rentvesting is to buy an investment property that is more than within your means to afford. Otherwise, buyers can find themselves in a financial bind as they try to keep up with both sets of expenses.
Before making any decisions, meet with a trusted mortgage adviser to make sure it is the right move for you. It’s also worth ensuring that you have a reasonable savings reserve for unforeseen expenses related to your investment property. It is vital to do the math and be sure you have the resources to cover the lifetime cost of the mortgage.
Do I need a mortgage adviser to begin rentvesting?
A mortgage adviserwell-versed in rentvesting can help you get financed for a home loan. If you’re considering rentvesting, talk to an adviser about how it could work for you and your vision for the future. Mike Pero has expert mortgage advisers all over New Zealand, so wherever you live, we have an adviser to help you.