Rent-vesting could be a compromise for a period of time to allow you to hold investment property(s) whilst meeting your lifestyle goals and trialling living in a different or preferred location and dwelling type. The downside of rent-vesting means that you delay purchasing a home for probably five years, and possibly longer to ensure you optimise your return on the investment property(s) and minimise your need to sell.
Australia’s desire to own our homes means that most people are only willing to pay so much in rent before purchasing their own home. Property ownership still outweighs the desire to rent for the vast majority of Australians. This is a key reason why rent-vesting is often cheaper than purchasing, especially when living in a capital city and living in a property valued above the median price.
The reasons for this phenomenon include:
- Our Principal Place of Residence is capital gains tax-free. Given the home is usually our most valuable asset, the home can assist with funding the transition to retirement should you decide to downsize.
- Most people want the security of knowing they cannot have the rug pulled out from under them and be asked to move at short notice which can happen when renting. Moving is normally a major hassle and cost. This is even more so when you have a family. Especially, if you are forced to move into a different school zone.
- Most people like to add personal touches to their home and yard. Having the ability to paint a wall, do a small renovation or grow a garden of your choice are key drivers for home-owners.
Despite this, rent-vesting is an increasingly popular option in Sydney and Melbourne in particular, because it is much more affordable to live in a higher-end rental home than it is to purchase one. Moreover, with higher-end properties, there is often less competition from would-be tenants because fewer people can afford to live in these properties, reducing the relative cost.
In addition, rental returns are generally driven by the dwelling – capital growth is generally driven by the land. Higher end properties normally have a higher land value, therefore the rental return as a percentage of the overall value of the property is often lower. For example, a property below the median price range may be more likely to achieve a 4% rental return, whereas a higher end home may only receive a rental return around 3% or less of the value of the property.
David is the Founder and Managing Director of Property Planning Australia, author of ‘How to Succeed with Property to Create your Ideal Lifestyle’, co-author of ‘Property for Life – Using Property to Plan Your Financial Future’, co-host of the ‘Property Planner, Buyer and Professor Podcast’ and a widely-published media commentator. With more than 20 years of experience, David is passionate about educating others to make informed, and ultimately, more lucrative property investment decisions. David established Property Planning Australia in 2004 – with the vision to educate and empower Australians to make successful property, mortgage strategy and money management decisions. Property Planning Australia’s operations have earned acclaim and national industry awards for its unique fusion of property planning, education, money management, mortgage strategy and risk management. All supported by multi award-winning customer service.