More and more often these days our broker, Tim Kerin, is finding himself talking to people who aren't quite sure that they can afford to buy where they want to live. As a result, they are more likely to end up living somewhere they're not really happy with.
Too often we see people having to sell up and buy in a different location in a short period of time because they're unhappy where they are, and this can be costly by the time they pay real estate agents, settlement agents, stamp duty and so forth.
What if there was another way of doing things?
Well, with a shift in mindset, perhaps there is.
What if you bought an investment property you can comfortably afford (or rented out the house you already live in, which you know you can already comfortably afford), and then rented a home in the location where you want to live?
Whether you're limited by your deposit or your ability to prove you can afford the repayments - or both - you might find that buying an investment property ticks a lot of your boxes.
With this strategy (which is often called "rentvesting") you could find a tenant to cover the majority of your loan repayment, making the property-buying decision based on what you think is a good investment, rather than on where you need or want to live.
Quite separately then, you can figure out how much rent you are happy paying, and then find the property to live in that suits you best.
Most people that go down this path tend to find two things:
a) they get the freedom to change location to suit their lifestyle
b) they feel like they've taken less of a risk and commitment on property
All of that is without factoring in the tax benefits of owning an investment property, which should be discussed with your accountant.
Tim recently spoke with a young couple who have a property worth $350,000 in an outer suburb of Perth, and were wanting to move to a nicer location, somewhere closer to work (ie a more expensive property). They're currently paying about $350 a week on their home loan.
Realistically, they're probably looking at moving to a property that's worth about $600,000.
Naturally, the first two options Tim and his clients looked at were:
1) selling the existing property to buy the new one; or
2) renting out the existing property and buying the new one.
Funnily enough, both of these scenarios work out to similar net cashflow. In the first option, they don't have as much debt, but they also don't have a rental income. In the second option, they have more debt, but they have a rental income to help service it.
While both options worked out to very similar cashflow situations, both were cashflow situations that felt beyond them, and they felt doomed to stay where they were.
That's where Tim raised a third option:
3) don't buy a $600,000 house. Become a "rentvestor" and rent one for about $450 a week, which is lower than what the loan repayments would be.
When we ran the numbers on this third option, it was a lovely halfway point between staying where they were, and either of options 1 and 2. They still got to live where they wanted to, they still got to own an investment property, and they felt like they could afford their total repayments.
This might be a shift from our very strong Australian culture of owning and living in your own home, but it's still worth at least considering as an option that allows you to have the lifestyle you want while still starting an investment portfolio.
In fact, we have even heard economists argue that you should simply always rent where you want to live, and then gradually build a portfolio of investment properties.
It's not an idea for everyone, and it depends how much you want to own your own home so you can have pets and paint the walls bright fluoro green and do whatever else you want, but perhaps it opens up your options at a particular stage in life.
Why not get together with Tim yourself to discuss the rentvesting concept further, and see whether it would work in your situation? Just call him on 9309 4780 or email firstname.lastname@example.org.
Here are some of our other informative blogs you may be interested in checking out:
Is Negative Gearing a good idea?
Offset Accounts and how to master them
First Home Owner Grant changes - how do they affect me?
How do I calculate my home loan repayment?
How is a mortgage broker paid?