Rent-vesting – The best of both worlds
Want to buy a home, but priced out of your chosen location? Ben Tutty looks at the rising trend for people to rent where they live and buy an investment property somewhere else.
9 March 2022
For many Kiwis, skyrocketing house prices, shifting demographics and changing lifestyles are making the good ol’ home ownership dream a thing of the past.
Median house prices in New Zealand increased by 26.4 per cent, from NZ$570,000 to NZ$700,000 during the year to September 2021. In Auckland, the median price is now NZ$1.2 million.
We’re also delaying getting married, having kids and settling down, and more of us live by ourselves.
Fortunately for us ‘children of the future’, it’s not all doom and gloom. There’s a nifty little strategy called rent-vestment that allows us to live the lifestyle we want, while still riding the capital gains train.
It’s an alternative to the Kiwi property dream that may sound strange, but for some it just makes sense (and dollars).
A different property dream
Rent-vestors are renters in their main home but they own one or more investment properties.
It’s a strategy that’s becoming increasingly popular for a few key reasons, says Jen Baird, chief executive at the Real Estate Institute of New Zealand.
“Rent-vestment can be a sound option to secure a financial future or get on the property ladder without making big lifestyle changes, because it allows you to live where you want, instead of moving to an area where house prices suit you, but the location doesn’t.”
For example, a rundown two-bedroom house in an average suburb can fetch NZ$1 million in Auckland’s market. Areas like Wellington, Tauranga and Queenstown aren’t quite as outrageously expensive, but they’re not far behind.
For people living in these cities, switching from renting to owning often requires downgrading to a less central area and a lower quality home. That might mean a longer commute, a commitment to staying in one place, more work on maintenance – and paying more per month for the privilege.
Ed McKnight, Informed Investor’s economist, says rent-vestment can help you reap the benefits of owning property without those lifestyle sacrifices.
“You might want to keep living near the city but are unable to afford to buy there, or maybe you want to stay in your two-bedroom apartment, which wouldn’t make a good investment.
“Rent-vestment allows you to keep your lifestyle as-is, and put your money to its best possible use in the property market.”
McKnight’s not just preaching, he’s one of many practising rent-vestors.
“I live in Auckland and I own property elsewhere,” he says.
“Andrew Nicol, the CEO of property investment company Opes Partners, was a rent-vestor until the ripe old age of 37.
“At certain times, we have both believed there are more productive uses of our capital than buying a home.”
A leg up the ladder
Speaking of practising rent-vestors, it turns out they’re everywhere. In fact, I’m one of them.
As lucrative as freelance writing is, my property prospects weren’t looking too hot in Auckland back in 2018.
So, instead of buying a NZ$700,000 two-bedroom apartment, I moved to Dunedin and bought a three-bedroom standalone home for half the price.
My partner and I used our KiwiSaver balances, the First Home Grant and our savings to scrape together a deposit.
We had to live in the home and work remotely for six months to satisfy the conditions of the First Home Grant but after that, we moved back to Auckland and rented the place out.
Years later, we were able to use equity from our Dunedin property to buy a home in Auckland.
Lauren from Gisborne, a 30-year-old interior architect, did something similar – she bought property in Gisborne, her home town, while renting in Auckland:
“It really came down to the Gisborne market still being within my price range, the numbers adding up and the appeal that it could sit and work for itself while I was overseas,” she says.
“The property values in Gisborne went through the roof, and rent closely followed. I would never be able to enter the market now.
“This year, the equity held by the property in Gisborne was enough for the bank to consider lending on a second property, and I was able to buy the apartment which is now my home in Auckland.
“The second key part of this was the boost the rental income gave to my overall income and my ability to service both loans in the bank’s eyes.
“The Gisborne property now acts like having flatmates, and gives me the financial freedom to live without flatmates in Auckland.”
Unfortunately for many, saving a big-city deposit just isn’t possible, especially in Auckland, where a 20 per cent deposit for a median priced home is NZ$240,000.
By rent-vesting, you unlock areas where homes are much more affordable and values are likely to increase. If you’re lucky and your investment does increase in value, you may even be able to do what my partner and I did and use equity to purchase a home in your chosen area.
You may, of course, have to deal with new laws that are cracking down on investors, such as higher deposit requirements (usually 40 per cent) and losing interest deductibility.
Buyers should also do all the usual house-buying due diligence, including seeking legal advice when buying a rent-vestment. But chances are, that’ll be easier than saving up NZ$240,000 for a deposit on the average Auckland home!
The future of home ownership
Back in 1991, property ownership in New Zealand was at a record high – 73.8 per cent of Kiwis owned their own home, according to census data. The rate of home ownership continued to decrease until 2018, when it hit 64.5 per cent.
This worrying statistic proves that home ownership is only getting harder, and that creative strategies, like rent-vesting, are necessary for some of us to get ahead. But how many Kiwis are already rent-vesting?
Nobody knows. There’s no data on the number of rent-vestors in New Zealand, and the census asks whether you own the home you live in, not whether you own property in general. That means, McKnight, my partner and I, and countless other rent-vestors would be counted as renters, not property owners, in all census data.
However, widespread rent-vestment is, there’s no doubt that it can be a great way to build wealth while maintaining the lifestyle you want.
After all, in a hectic housing market like New Zealand’s, a little creativity can go a long way.
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