Most people in Australia believe the old saying “rent money is dead money”, but as you’ll see in this article on renting and property investing, this isn’t necessarily true.  If you’re smart about it, renting in your younger years can be a great financial planning strategy to help you own your own home sooner.  Don’t believe us?  Read on.

 

Rent Before You Buy – The Rental for Property Ownership Strategy
Renting is where most young people in Australia first start out after moving out of the family home.  It’s the most affordable housing option but many people have a negative attitude towards it as you’re not living in your own home and the rent that you are paying is helping someone else to pay off their mortgage.  Whilst this is true, renting can actually have a silver lining.  Being a renter allows you to live in a property that you’re unlikely to be able to afford to buy.  Most importantly though, the time that you spend as a renter is a perfect opportunity to implement a property investment strategy that can help you to work towards owning your own home in the future by investing in property.

While you’re renting you have an opportunity to use any extra cashflow to build up an investment property portfolio.  If you do this in your early years, it’s likely that by the time you’re in your late 30s, you’ll be able to afford to buy your own home, and probably one that is more expensive than your first home if you saved a deposit for all those years instread.

The key to the success of this strategy is to harness the compounding growth of property instead of holding cash in the bank.

An Example of the Rental Property Investment Strategy in Action:

Scenario 1:  Let’s say for example you had saved $50,000 and had it sitting in your bank account earning 5% per annum.  You’d earn $2500 per year in interest.

Scenario 2: Instead, if you used that $50,000 as a 10% deposit on a $500,000 investment property.  By investing in an asset worth $500,000 you can harness the growth potential of that property (let’s say 6% per year).  For this example, 6% of the $500,000 means that your net worth will grow by $30,000 per year instead of only $2500 from the “cash in the bank” strategy.

By looking at this example you can see how having investment properties instead of just putting your savings in the bank can be a far smarter approach to affording your first home later in life.

 

 

Financial Planning Tips for Being a Smart Renter:

1. Buy Property Wisely

Don’t buy an investment property based on emotion.  Remember that although this is your first property purchase, it’s an investment, not your home.  Make smart choices about what investment property to buy based on growth potential and rental income.

2.  Don’t Fall into the False Belief That You’ll Never Own Property

Yes, property prices in Australia are becoming more and more expensive.  But remember that when assessing the affordability of property, they tend to look at the cost of their dream home.  Remember the old saying “you have to start somewhere”.  Start small with investment properties and slowly build up your property portfolio over time.  Build towards owning your own dream home later down the track.  Property is only too expensive when you live in it and aren’t able to enjoy the tax benefits and cash injections from tenants.

3.  Invest in Property As Soon As Possible

Time is your biggest ally when it comes to investing, regardless of whether you’re investing in property or any other asset class.  The sooner you can start investing, the more likely that you’ll be able to harness that growth potential for your future dream home.

4.  Don’t be Afraid of Debt

Know the difference between productive and non productive debt (good and bad debt).  Debt is not necessarily a bad thing when it’s being harnessed to provide you with accelerated growth to your net worth.

5.  The First Home Buyers Grant Isn’t Everything

Yes it’s true that if you use investment properties as a stepping stone to owning your own home in the future, that you won’t be eligible to receive the First Home Owners Grant.  But don’t be blindsided by this and let it stop you from growing an investment property portfolio.  It’s likely that holding out to be able to be eligible for the Grant won’t be worth it in the long run and the net growth you’ll make by implementing an investment property portfolio will far outweigh the value of the First Home Owners Grant.

6.  Make Sure You Offset Your Investment Property Loan

Once you’ve purchased an investment property, be sure to allocate any savings you have to your offset account.  This will reduce your payable mortgage and can save you a lot of money in interest.

 

 

Saving to afford your own home?  Need some personalised property advice strategies?  Our professional Sydney financial planners can help you to map out an investment property strategy and can even help source potential investment properties for you.

Call one of our friendly financial advisers in Sydney today on 02 8238 0888 or visit our Financial Planning Website for more information.

 

Share