The phenomenon of “rentvesting” has been popular with people wanting to get their foot onto the property ladder while not giving up their particular lifestyle. Like with most investments, the opportunity cost of choosing one investment opportunity over another is the key factor determining your return. The problem that most property investors don’t realise when investing in the residential property market. Is that they tend to focus on measures and metrics that are more suitable for other asset classes than the property market. They also brush over worst-case scenarios and what they would need to do to keep their investment property.
Let’s forget about the all-important factors of location, land tax, or other financial concerns of whether to choose an interest-only loan or not. Most of these have already been answered on countless podcasts, articles, and blogs.
These are the 3 tough questions you need to ask yourself when considering rentvesting and how to maximise your return
Are you prepared to live in your investment property?
When you purchase a property, you are already imagining how to decorate it, live in it, and the income you receive when you rent it. Few take into consideration what would happen if you lost your job, interest rates were to rise significantly, or even a special levy was put in place for significant repair. Where do you see yourself in 10-15 years? Could you bring up a child in a one-bedroom apartment? Could you give up your lifestyle to keep the property? What else are you able to do to keep the property? Would you rent out the second bedroom, perhaps the car space or lock-up garage? Like many of our parents who experienced interest rates of 17% and more. They made sacrifices in order to keep their family home. What are you prepared to do?
How easy would the property be to sell?
This is easily seen but rarely acknowledged. Your first impression of a property is most likely the same for most people who enter the property at an inspection. It may be too small, too dark, or too noisy. These are the same considerations that people will have again when it is time to sell the property. These impressions could cap your capital growth if you are unable to mitigate the issues. It’s important that when considering purchasing a property, you not only consider living there yourself but would other people live there too and who are these types of people. The greater the audience, the greater the demand, the easier it would be to sell.
What could you do to maximise the capital gain?
Rentvesting is all about maximising your capital return. What aspects of the property can be improved on to draw a greater buyer pool. How can you attract a higher price? Renovating the kitchen and bathroom then re-painting the walls and replacing the carpets are property flippers’ bread and butter. Few realise that while modern design and a cheap renovation do present the property positively in attracting the higher price, they negate the momentum of the market in general as the real key factor in the 20% return. (see this cautionary tale)
Is there a by-law that allows the purchase of the attic space to potentially create a third bedroom? This means comparables properties presented by the agents at the inspection will be three-bedroom apartments instead of two. Can parking be purchased on title? The property was purchased without parking but sold with a car space. Is the property company-titled? Converting to more secure property rights gives the property an instant capital gain despite the small cost of approval. These maneuvers are risky as they normally require council or strata approval, but the capital gain is far more significant than an apartment with a paint job even by Pablo Picasso
These questions help you think long-term in your property purchase even though rentvesting is generally a short-term purchase. you should be prepared for the future that may not suit you. These questions should help set you up into entering a very lucrative property career. As your first property should propel into purchasing the next bigger and better property, only using the capital gain rather than your savings.
Good Luck
Alexander Gibson
Were the answers to the tough questions about rentvesting what you were expecting?