The Experts

The rise of renter-investors

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There is a rising number of young buyers who are choosing to purchase an investment property instead of their first home so they can get a foot in the door of the property market while continuing to live in the lifestyle locations they like. They’re dubbed ‘renter-investors’ and it’s a growing trend. In fact, one academic estimates 11 per cent of all residential properties are purchased by people who rent their own homes*.

There are two reasons for this. Firstly, we’ve known for some time that many young Australians are valuing lifestyle over the traditional dream of home ownership. They’re renting in beachside or cityside suburbs where there’s a café culture, restaurants, nightlife, entertainment, recreational facilities and fast CBD access to work. They can’t afford to buy in these locations but they don’t want to move to the outer ring where properties are cheaper. So they’re left with two options. They either rent for life or they buy for investment.

This choice means they don’t qualify for the First Home Owners Grant, which is only available to first homebuyers who have never purchased property before. But they do enjoy the significant tax benefits of negative gearing and with rental returns so strong right now they have greater ability to manage the repayments on an investment loan.

I have long advocated home ownership as a cornerstone investment in people’s financial future. However, I would rather see young Australians buying an investment property than doing nothing at all.

Property has proven itself to be one of the best asset classes for wealth generation and as long as these young buyers are sensible about their ability to pay high rents themselves as well as the repayments on their investment loans, then good luck to them.

Renting-investing is entirely do-able if you’re on a good income. Here’s the numbers, using Sydney as an example.

  • One of the suburbs I like for apartment buying right now is North Parramatta, where the median apartment price is $345,000.
  • With a 10 per cent deposit, the monthly repayment is $2087.
  • Rents in this area are an average $360 per week for a two-bedder and $420 per week for a three-bedder. This represents a very strong rental yield of between 5.4 and 6.3 per cent.
  • Say you buy an apartment for $345,000 and get the minimum rental return of $360 per week. That’s an average $1560 per month, leaving a $527 gap or an average $120 per week gap over the year.
  • Although this gap doesn’t take into account costs such as strata levies and council rates, this out-of-pocket expense is tax deductible – as are the strata levies, council rates and other costs too!

So, these young executives can live in a rental by the beach and close to work while still owning property to secure their future wealth. And there’s one thing I haven’t mentioned… capital gains. Their investment property will keep growing in value – in our example here, North Parramatta apartments appreciated a respectable 4.55 per cent or $15,000 in 2010. Not bad!

* Dr Terry Burke, professor of housing studies at Swinburne University

 

Published: Wednesday, April 13, 2011

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