SYDNEY — For the majority of young people, getting a foot on the housing ladder remains an elusive prospect.
Yet, while would-be homeowners continue to tussle against rising house prices and stagnant wages, a growing section of young people are bringing new meaning to the label "generation rent" with a creative take on property ownership: Rentvesting.
Rentvesting refers to buying and letting out an investment property in an affordable, up-and-coming area, while continuing to rent your primary residence in your preferred location.
The notion of owning investment properties to supplement the main home has, of course, been around for many years. But, today, more and more young people are choosing to defer buying their own homes and are instead jumping straight into rental investments, according to Australian online property site Domain.
"We're seeing that a lot of people are now looking at the rentvesting idea," advice editor Daniel Butkovich told CNBC Make It in Sydney.
In Australia, like the U.S., around one-third of 25 to 34-year-olds owned a property in 2018. Of those, around half were investment properties, holiday homes or homes they did not live in, according to the Australian Bureau of Statistics' Survey of Income and Housing 2017/18.
The trend, which is particularly popular among young professionals in Australia's major cities, speaks to the continued attractiveness of the real estate market, but an unwillingness among young people to compromise their living standards to get in on it. And, according to Butkovich, it can have "a lot of merits."
"One, you get to live where you want to live. Two, your money is put to work in an investment. And three, you can take the emotion out of the equation of buying," said Butkovich.
"Then, five years from now, you can sell that property and use the proceeds and any other savings you've got to buy that dream home," he continued.
Rentvesting, however, is not without its difficulties, Butkovich noted. Many of the hurdles that afflict regular first-time home buyers will persist for rentvestors — and new ones, such as higher borrowing costs for buy-to-let mortgages, may arise.
Here are 5 things to consider before taking the next step.
1. Do your sums
As with any property purchase, it's important to make sure a rental investment makes financial sense for you.
You'll need to ensure you can cover any upfront costs, such as the down payment (usually 10% to 20% of the purchase price, though often more for a buy-to-let property) and closing costs, as well as the monthly mortgage repayments.
Ideally, the rental income will cover the mortgage repayments — potentially even with money left over. But, if not, you need to make sure that you'll be able to cover any shortfall with your own income.
2. Choose your location wisely
While your rentvestment property may not be in an area that you personally desire, you need to make sure it's one that others do. Preferably, that will be an area popular with owner-occupiers, rather than other investors, as those tend to see the greatest appreciation and are better able to withstand economic downturns, said Butkovich.
Look at local data to find gentrifying locations. Those tend to be areas with high income and population growth rates. Generally though, said Butkovich, areas with good links to a city's central business district and close proximity to parks and schools tend to be good bets.
3. Figure out what kind of rentvestor do you want to be
Think about how hands-on of a landlord you want — and can afford — to be.
If you're happy to get your hands stuck in, you may be willing to consider a larger purchase further out of the city and with renovation potential, said Butkovich. But if you'd rather be hands-off, a more central apartment may be a better idea.
4. Have a safety net
Although your rentvestment may be a good money-spinner, it's important to be prepared for the unexpected costs that can crop up for all homeowners.
Be sure to build an emergency fund to pay for repairs and improvements. But remember, as with other business expenses, many of those can be put against tax.
5. Think long-term
Finally, all home purchases — even business ones — should be made with a long-term view. The upfront costs of purchasing a property are substantial, so you want to be sure that you will at least recoup those in the property's eventual price appreciation.
"For any property decision, you should be looking at a minimum of five years I would say ... and ideally more like 10," said Butkovich.
This story has been updated to reflect the correct spelling of Daniel Butkovich's name.
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