What Is Rentvesting And Should I Do It?
When most of us consider buying our first ever property, we think about ourselves - as in, us, living in it, literally. A home of our own, finally.
No landlords to deal with and rules about decorating to consider anymore. Maybe needing a spare room or two to fill with pets or babies. A yard to BBQ in. Dinner parties with friends. The usual homeownership dream. However, nowadays, in today’s increasingly competitive housing market, young property buyers are entering the market in a very different, more strategic way. Enter the trend of… ‘Rentvesting’.
Rentvesting is when you purchase a property as an investment (e.g. to become a landlord) while continuing to rent a property for yourself to live in, hence still paying rent to your own landlord. This is a very different way to become a first-time buyer and it may sound counterproductive. If done well however, it can see you secure your dream home faster than ever. Let’s break it down with a fictional example…
Sarah is in her early 30s and lives and works in central London, where she rents a flat in an inner-city zone. She wishes to continue living in the city long term and expects this will be possible as her career prospects grow. Given the average price of a property in her zone 3 location is well above £600,000 not to mention a 25% deposit of approximately £158,000, it is not possible for her to buy right now despite her extensive savings efforts. After consulting a financial advisor, Sarah decides that she will use her savings to purchase a flat in Croydon, zone 5, where the average house price is £359,336. Sarah will become a landlord, securing a buy-to-let mortgage, which she will pay off through her rental yields. With time, and especially as rental prices increase in this area of London, Sarah expects she will profit from her investment. Rental yields combined with her own saving will see her be able to put down a deposit on an apartment of her own, in her dream location, quicker than if she continued to simply save her salary.
A real-life example
Rentvesting is becoming a trend all over the globe. Here is an example from Australia via ABC News
Cayla Owins, 33, loves living in Melbourne, but couldn't afford to buy there. She is single. Instead she saved up around $35,000 for a house deposit (by cutting down expenses and using a high-interest bank account) and used it to buy an investment property in Bendigo, in regional Victoria (an area outside of Melbourne). She bought the house for $355,000 in 2014 and since then has continued to rent an apartment in the city’s eastern suburbs.
"For me, working as a professional, Melbourne was where I needed to grow professionally, and personally [and affordability] was in Bendigo.
"I enjoy this suburb and if it means I have to rent, that's what you do.
"The tenant's rental payments meet a fair amount of the mortgage repayments and I just top it up.
"I focus on the payment first and I pay it in reverse, I pay off my mortgage and her rent comes in to subsidise my income.”
Ms Owins is paying both principal and interest on her loan, and one day she hopes to use the equity in the property to buy her own place, and ideally have a rental portfolio which would act as her nest-egg for retirement.
"I can build from here," she said.
"My dream has started."
The advantages of rentvesting
- You are able to enter the property market sooner and with a smaller deposit, as opposed to waiting several years until you can eventually afford your dream home in a preferred location
- Rentvesting allows you to start building your investment property portfolio, which can be used to generate wealth for you and your family in the future
- Rental yields and careful financial planning may allow you to save for your dream home faster
- There is greater flexibility. You can live where you want in the meantime, move as often as you like without having to worry about stamp duty expenses, legal costs and so forth, and generally enjoy a greater sense of freedom in your youth
- You can choose where you invest. Where you want to live and the best place to buy an investment property often won’t be the same, so rentvesting allows you to be ruthless when it comes to choosing an investment.
- In most areas, it is still cheaper to rent than buy and pay off a mortgage. For many, reinvesting that saving in BTL is a smart option.
The disadvantages of rentvesting
- It’s a big financial commitment. You’ll need to be fairly confident that you can afford to pay off the mortgage repayments each month, not to mention the costs associated with keeping the property in good order for your tenants. If you, for example, lose your job or experience financial hardship, this could become a problem
- Becoming a landlord is a huge responsibility, legally and mentally. You should seek financial and legal advice before making any decision and be sure it’s the right option for you
- It can be disappointing to own a property that you cannot make your own. You won’t be able to develop an emotional connection in the way average first-time buyers do
- Some buyers will be concerned that still paying for rent is a waste of money or ‘dead money’ and would rather invest in a property of their own. This depends on your overall financial outlook and personal circumstances
- Fees and interest rates for buy-to-let mortgages are generally higher than normal mortgages.
In the end, there are pros and cons to both buying and rentvesting, so you’ll need to consider your own financial circumstances before deciding which option is right for you.
Securing a BTL mortgage
If you are buying a property to rent out to tenants for a profit, you must get a buy-to-let (BTL) mortgage. Of course, a mortgage being when a bank or lender gives you money, which you must repay (in monthly instalments usually over a period of several years), to purchase a property such as a city flat or house in the suburbs. BTL mortgages, while offered by various banks and building societies, are traditionally more expensive than a standard residential mortgage, with less favourable fees and rates, because they are considered higher risk. That’s not to say that you cannot secure a great deal, but you should shop around and perhaps enlist expert advice before locking anything in.
How are BTL mortgages different to regular mortgages?
As explained above, there are different conditions associated with a BTL mortgage, which does mean your repayments and rates might be less favourable than a traditional residential mortgage, given a BTL mortgage must be secured against the additional risks.
If you want to take out a BTL mortgage, you’ll also need a higher deposit than you’d need for a residential mortgage - at least 25% and often up to 40% (the best deals often require you to have a bigger deposit).
If you are unsure about which mortgage is best for you, check with a mortgage advisor.
What is a HMO?
Another term you’ll need to become familiar with if you wish to become a landlord if HMO, or, ‘House in Multiple Occupation’.
A property is a HMO if:
- at least 3 tenants live there, forming more than 1 household
- you share toilet, bathroom or kitchen facilities with other tenants
Many landlords are choosing to invest in HMOS, because they can offer a great return on profit. However, the legal side can be tricky, so best speak with a qualified property lawyer if you are considering this type of investment.
Useful reading for first-time buyer and landlords-to-be
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Content correct at time of publication.