• First Home Buyers
  • Investors

Thinking of Rentvesting? The Top 3 Things to Plan For

You want to invest in your first property. You know the perks of paying off your own mortgage rather than someone else’s, and seeing your wealth rise with property prices. But the best value suburbs aren’t in the location you want to live in. You’ll be too far from work, family and/or fun. You don’t want your first property investment to be at the expense of your personal or professional life.

Thankfully it doesn’t have to be. Welcome to the world of rentvesting.

If you don’t want to give up your current lifestyle, but you can’t afford to purchase in your ideal location, no problem. Continue renting and living where you like, while you buy a cost-effective property in a growth suburb and rent it out.

It sounds simple, and for the most part it is. But smart ‘rentvesters’ know that to succeed, you need a good strategy. The property market is a cycle. In the long term, property prices have tended to increase, but in the short term there will be ups, downs and market changes that you need to prepare for.

To come out on top in property, you need to be able to survive all stages of the property cycle. And how does a savvy rentvester do that? Let’s take a look.

1. Vacancy

It’s normal for any rental property to have a period of time between one tenant moving out and another moving in. Before you buy a property, you can research the average rental demand in an area and how long it takes to find a tenant. However, it’s important to remember that market conditions can change and extend that time period. Every week that a rental property is left empty is lost income. For rentvesters, a vacant property comes with an added level of urgency – you’re already paying rent where you live, and to cover an entire mortgage on top of that for an extended period of time could be a bridge too far for many first home buyers. So how do you manage the risks of vacancy?

– Do your market research before investing. Understand the average number of days properties go unoccupied for in the area. This could be days between tenants or while doing maintenance, renovations etc. Then factor that into your budget.

– Your leaseholders are essentially paying your mortgage off for you. Finding quality tenants and treating them well is essential if you are to enjoy a stable rental revenue stream.

– One of the most common reasons for vacancy is property neglect. Don’t stand idle while your property falls into disrepair – keep it fresh and functional.

– Whether managing your property personally or professionally, ensure that all marketing avenues are explored, such as website listings on realestate.com.au and Domain, targeted social media campaigns, and even an old fashioned sign out the front.

– Ensure your rent price is competitive. If your property is left vacant for an extended period, consider lowering your rate – some money is better than no money.

Running the numbers

If, for example, it takes 1 week to fill your apartment, you should factor that amount into your budget. Say your rental income is $450/week, 1 week without rental income means your real income is actually $441 per week (or $22,932 per year). 2 weeks without rental income equates to $432 per week or ($22,464 per year). You will need to make sure that you can budget for some time without rental income, by either factoring in a lower income number into your cost calculations or making sure you’ve got money set aside in case there are some weeks without a tenant.

If you’re not sure how to find out what you should budget for, a great idea is to call a few local property managers and ask them – they are the local experts. Let them know you’re considering buying in the area and ask them for advice. You could even ask them for a property management proposal, that outlines what rent they can expect the property to bring in and a breakdown of management costs. Whether or not you decide to use a property manager or not, you’ll have some great information based on the current local market to help you plan.

2. Home value dropping

“The bubble’s going to burst. The current prices are unsustainable. The bottom is about to fall out of the market.”

Catchy headlines get clicks. You can’t go a week without seeing a housing market doomsday piece, and while real estate cycles are a normal part of the market, the truth is far less scary.

The property market goes through the same four phases again and again:

  1. An area’s prices are rising. This usually begins slowly, but increases in speed as buyers gain confidence.
  2. The market peaks. Prices reach their maximum or the market becomes saturated.
  3. An area’s prices fall, self-correcting in response to the inflated valuations.
  4. The market re-stabilises, this time at the lower end. Once buyers gain confidence the cycle starts again.

The average length of this whole process? Just seven years, though it can happen in as few as three or four. So it is incredibly important that rentvestors research an area’s history and look at the future growth fundamentals, buy when prices are at their lowest point, and understand that while values will fluctuate in the short term, property investments are usually for the long-term. Despite a few dips, the nature of real estate cycles mean values will rise eventually.

3. Interest rate changes

The Australian interest rate is at a record low – 1.5% – and has been for two years now. As a property investor that’s great news. But the good times won’t last forever and interests rates change for a variety of reasons. Late 2008 saw the interest rate at over 7%, while in the late 80s it was close to 20%. While there is no indication interest rates are set to rise dramatically (the 80s and the global financial crisis of 2008 are quite extreme examples), you should be prepared for some change in interest rates.

It is best to leave yourself some wriggle room. If you’re going to struggle to keep up with repayments when the interest rate rises by a few points, consider a more affordable property or repayment plan. You should run the numbers on what you might have to pay each week if the rates rise by 1%, 2% and 3% and make sure you can still afford it. It’s also wise to repay as much of your loan as possible in these good times, and minimise the damage that a rate rise could do.

Rentvesting is a solid wealth-building strategy to help first home buyers get on the property ladder without sacrificing the lifestyle and location they want. Particularly in Australia’s ever popular capital cities, where homes are becoming increasingly expensive. But as with any major investment, a good strategy to manage potential risks is essential.

Do it, and do it well. Have that cake. Eat it too.

 

Disclaimer: This article should not be relied upon as a substitute for professional advice and readers should consult legal or financial advisors before making any buying or selling decisions. Copyright belongs to Coronation Property Co Pty Ltd (“Publisher”). This article may not be reproduced or distributed without express permission from the publisher.  CGIs are indicative only. For full disclaimer visit Insights Hub.