Rent-vesting a way to create wealth in property market

Owning a new home might seem out of reach but with this savvy move you can get into the market and earn serious money.

Owning a new home might seem out of reach but with this savvy move you can get into the market and earning serious money.

Owning a home feels out of reach for many Aussies, especially younger generations.

Ten years ago, it felt out of reach for me too. But I took a path less travelled to get into the market and now I’m $370,000 better off.

Here’s how you can do something similar.

In recent years, the practice has been named ‘rent-vesting’. But the concept is far from new.

If you can’t afford to buy a home to live in, you buy an investment property somewhere more affordable, get tenants in it to take care of your mortgage repayments and then keep renting where you want to live.

Over time, the value in your investment property will increase, building wealth in the form of equity.

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It’s a way into the market sooner. And being in the market sooner means maximising your time in the market. The longer you are in the market, the more wealth you can generate.

Australian property moves in cycles all over the country. There will be a growth cycle where values increase, followed by a correction, where values fall below their peak, a recovery and then the next growth cycle. It’s been happening like this for decades.

The sooner you are in, the better. If you wait, you risk prices growing faster than you can save, which will mean your goal is getting further away.

Surfers Paradise gave me an entry point into the market with a strong rental return. Picture: iStock

How I did it

When I first wanted to buy, I had nowhere near enough saved for a deposit in my local area, but wanted to get on the ladder and put my savings to use.

I engaged a buyer’s agent, who found me a one-bedroom unit in Surfers Paradise for $159,000.

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I would never had found this deal on my own. The buyer’s agent had vast experience buying in southeast Queensland.

I had to pay him $8000 in fees, but when I looked at the property online, it had been listed for $175,000, so I was still ahead.

My purchase price was also $15,000 less than what it sold for 15 years earlier and it had a tenant in place paying $270 a week.

After paying a deposit, the buyer’s agent fee and stamp duty, my loan was $127,000.

I paid interest only in the initial stages at a rate of 6 per cent … about $150 a week.

This meant I had $120 a week on top to cover other costs, such as my property manager’s fee, which was 5 per cent of the rent ($14 a week).

I was immediately better off each week than if I had no property.

Fast forward a decade and my apartment has now been valued at $420,000 and rents for $460 a week.

I’ve created $300,000 in wealth, plus an extra $70,000 in surplus rental income.

Young buyers have a way into the market after all.

Where can I do this today?

Property was cheaper 10 years ago, but there are still markets across Australia with affordable entry points and strong rental returns.

To be positively geared, the general rule of thumb is a 6 per cent rental yield or higher. The rental yield represents the percentage of the property’s purchase price that it returns each year in rent.

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Let’s aim for 7 per cent to be safe. A look at PropTrack data reveals 193 suburbs around Australia where houses or units have a 7 per cent plus yield.

The highest yields tend to be in regional parts of Western Australia and Queensland, near mining operations.

Mining towns can be volatile places to invest, but there are plenty of other options out there.

For example, Perth currently has 14 inner suburbs where yields are higher than 7 per cent for units. Six of these have median prices below $400,000. And Perth is tipped to lead the nation for value growth this year.

Perth offers some serious value opportunity for investors. Photo: iStock

Uptake remains low

Canstar data insights director Sally Tindall analysed the most recent first homebuyer lending statistics from the ABS and found that out of 10,215 loans settled in September 2024, just 711 were for investment properties.

“Thinking outside the box can help get that first foot on the property ladder,” Tindall said. “Entering the market as an investor could boost a first homebuyer’s maximum borrowing capacity, particularly for those planning to continue to live in the family home rent free. Add on top of this, the benefit of having a tenant help pay the mortgage and for some people, the financial side of rent-vesting suddenly makes more sense.”

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Tindall said, however, that investing has its risks.

“Make sure you understand the tax rules around investing and potential spanners such as capital gains tax,” she said.

“Look closely at vacancy rates in the area to (help) understand how easy your new home will be to lease out (and) get at least one independent valuation of how much the property will rent for, in addition to what the sales agent tells you.

“If getting into the property market was easy, there wouldn’t be so many prospective first home buyers looking for a way in. Sometimes the shoe might not fit perfectly, but it’s enough to make steps in the right direction.”

Originally published as Rent-vesting a way to create wealth in property market