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As Australian property prices continue to rise, first-time homebuyers are finding creative ways to enter the market. For some, that means relocating to more affordable markets, such as Western Australia or Queensland. But for those who don't wish to ditch their current zip code, there's another option: rentvesting.
The formula is simple: buy an investment property in a more affordable area, rent it out and then live in another area by renting.
"The beauty of rentvesting is you live where you want to live, but you buy in another part of the market that suits your budget," Luke Ashby (pictured), a mortgage broker at Emerge Finance, told the Australian Broker. The Queensland-based broker said the practice has been picking up steam in the last 12 months.
"Particularly in Brisbane," he said, "where you need to be earning at least $120,000 or more with no debt in order to buy. And not everyone makes that much. Rentvesting is the next best option to get into the market."
But according to Money.com.au, rentvesting is happening nationwide. In fact, rentvesting rose 21.4% year-over-year, according to the latest Mortgage Insights Report. The report showed that the majority of first-time buyer loans for rentvesting were in New South Wales, approximately 9.3%.
Ashby said the strategy is often used by younger clients.
"Maybe they're living at home with mum and dad and they're still looking to get into the market. Their buying capacity is stronger in that scenario," he said. "Or they can't afford to buy where they want to live. They'll buy an investment property where the property sits within their budget."
Perth and other parts of Western Australia, as well as Townsville and Toowoomba in Queensland, have become top spots for purchasing investment properties, the broker said.
And as the cost of living continues to climb, Ashby predicts so will rentvesting.
"It's becoming more and more common as the clients become more educated with the option of rentvesting," he said.
As with any strategy, there are pros and cons.
With rentvesting, Ashby will often recommend a buyers' agent to potential borrowers.
"If it's within their budget," he said. "Because it's good to have a connection with that area, and local knowledge is key."
Another thing to consider is that first-time buyer incentives are only available to owner-occupied properties.
"And you can only be a first-time homebuyer once and get the incentives," Ashby said, emphasising the importance of crunching the numbers to see what's right for each client.
"If they want to invest in a property, maybe they can hold for a few years, then sell and get the equity in another location. But they won't get the incentives," he said.
"Clients usually come to me and say they want to buy a house and I try to figure out what's best for them," Ashby said. "I let them know what they need to do to get where they want to and help them explore options. With rentvesting, it's usually me planting the seed."
