Buy or rent? Rent to own? Or avoid investing in property at all? If you’re planning to be a first homeowner it’s likely you’ve heard the term ‘rentvest’ as an alternative to buying a home.
Rentvest is the latest portmanteau (also known as a word blend, ie ‘hangry’ or ‘brangelina’) given to a recent millennial buying trend.
Rent-vesting lets you buy an investment property without living in it
Millennials living in metropolitan Australian cities can no longer afford to buy a home in their chosen suburb. Many now opt to buy an investment property in a more affordable location which they rent out while also renting in their chosen location.
It’s a foot onto the property ladder and because the deposit and mortgage payments are lower, the millennials penchant for a flexible lifestyle still allows them to travel, eat out and the freedom to move around.
But is rentvesting really the best way to invest your money?
The numbers on renting versus buying in Australia
A few reports made a media splash that showed the great Australian home ownership dream is slipping away for many young people. The Household, Income and Labour Dynamics in Australia (HILDA) reported home ownership among those aged between 25 and 34 dropped from 38.7% in 2002 to 29.2% in 2014, the largest chunk of that decline happened between 2010 and 2014.
Furthermore Standard & Poor’s found the proportion of Australian homeowners falling behind on mortgage repayments has increased. May was the seventh consecutive month where mortgage arrears increased to a rate of 1.21%, up from 1.14% in April and 1.07% a year earlier. At the same time the national average rental vacancy rate for investment properties has climbed according to SQM.
It brings into question the long-term viability of ‘rentvesting’ and home ownership as the best way to invest at all? Maybe it’s time to drop the obsession and make like Germany where most people rent, and tenants have far greater rights than here in Australia.
Rental yields (what you earn from owning a home) have fallen in major capital cities like Sydney and Melbourne to well below 3.5% meaning that investors are now relying heavily on house pricing rising to earn a return. If house prices don’t continue to rise outpace income growth, property may not be such a great investment over the coming years.
Rent or buy property – the sums
We’ve done the sums on renting vs buying a home over the long term. We’ve found there’s not a great difference between renting and buying. As long as renters are disciplined about saving and investing, the real estate agent mantra ‘rent money is dead money’, doesn’t hold up. We also looked at the pros and cons of buying property compared to other investments like shares.
Turns out the Reserve Bank of Australia (RBA) had similar findings to us. Their research found that since 1955, the difference between renting or buying a property is minimal.
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