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How to gain a foothold in the property market through 'rent-vesting'

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Renting while investing in a residential property has become a tried and proven way to get a foothold on the property ladder.

Some studies show that up to one in five first home buyers actually purchase an investment property before they buy an owner-occupied house or apartment.

The national mortgage broking group, Mortgage Choice, says “rent-vesting” accounted for 10 per cent of the mortgages it transacted in 2010. By 2015, young people either living at home with their parents or renting a place to live in, were substantial purchasers of investment properties and accounted for about 22 per cent of the group’s mortgage transactions.

That figure could rise as younger property buyers take advantage of today’s coronavirus-influenced market, in which vendors are listening to offers and displaying a hard-nosed willingness to sell.

Nelson Alexander Sales Director Arch Staver says it has been a common occurrence for young first home buyers to continue to lease a property to live in in the inner-city and to buy an investment property a little further out. They then rent out the purchased property to pay down the mortgage, while living in their preferred location.

“It’s a great way to get into the property market,” Mr Staver says.

“The reality is that there is exceptional value for money now. We are seeing vendors selling a property in the mid-$800,000s, for example, where seven months ago they would have been insistent that it must make $1 million.

“So there is a willingness to sell among the vendors now – and when you have a willing vendor a buyer should absolutely pounce.

“Rent-vesting means that you don’t have to compromise your lifestyle. You can either stay with Mum and Dad or you can stay in a share house or in rental accommodation. If you have a job and income, the banks are willing to lend, so you should get in.”

Paying rent in your preferred area to live is often more affordable than servicing a mortgage on that same property or on another home in your preferred area. If you are smart with your money and play your cards right, the residual cash flow between the cost of renting and servicing a mortgage in a preferred area can be put towards a new investment property acquisition.

Renting, or living at home with your parents, while investing is often more affordable than most people think. Simply going for a lower value property with solid capital-growth prospects in an area that commands higher rental yields can quickly ease the pressure of mortgage repayments.

Mr Staver says despite the Covid-19 restrictions, prospective buyers are confronting a market with numerous positive factors in play. These include record low interest rates, banks that are more prepared to lend than they were in the 2017-2019 period, and motivated vendors.

“Sellers are absolutely motivated, and there are still excellent opportunities to purchase homes at competitive prices,” he says.

There are some indications that rent-vestors may be less active at the moment. In Mortgage Choice’s Property Ownership Survey 2020, conducted earlier this year, 6.6 per cent of prospective buyers say they will use rent-vesting as a strategy to get into the property market.

But younger buyers are in a strong position to steal a march on other buyers, given the highly competitive lending environment.

Mortgage Choice CEO Susan Mitchell says the Reserve Bank of Australia’s move in July to keep the nation’s official cash rate on hold at 0.25 per cent is good news for buyers.

“RBA board members have indicated that the next move for the cash rate will likely be up, however this is a long while off,” she says. “In the meantime, the historic low cash rate continues to support an extremely low cost of borrowing, which is supporting activity in the home loan market."

“Lenders have been pulling out all stops to compete for market share and over the last few months, we have seen cash back offers and interest rates lowered across both variable and fixed rate home loan products.”

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