The pros and cons of ‘rentvesting’

Some people own a property but rent the home they actually live in and there are many reasons why. reports.

Miriam Bell

When Aucklander Don Rennie bought a property near the beach in Mangawhai Heads in the late-1980s he planned to turn it into a holiday getaway for his family.

He built a three-bedroom house with a double garage and self-contained studio above it, but his marriage broke up, and he ended up with the Mangawhai home.

Work and travel meant his initial plans to move into it did not pan out, but he has held on to it, sometimes renting it out, while renting homes elsewhere himself.

Now he is nearing retirement and, when that time comes, he is looking forward to heading north and finally moving into his property.

He has always enjoyed spending time there, and it has been great to have the security of owning a property while having the freedom that comes with renting, he says.

‘‘Financially, it’s worked out well. The section was $42,000 and the build brought the final cost up to about $80,000. The mortgage is long paid off and prices in the area have soared in recent years.’’

Rennie is one of many people who own a house but do not live in it and rent instead. The exact numbers are unknown because while researchers can tell ownership from a property’s title, it is difficult to identify whether it is used by an owneroccupier or as a rental or holiday home.

CoreLogic chief property economist Kelvin Davidson says work is being done to identify how properties are used, but it is too early for representative figures. ‘‘I doubt a massive number of people don’t live in the home they own, but it’s not uncommon and a reasonable amount of people will fit the bill.’’

‘‘Financially, it’s worked out well. The mortgage is long paid off and prices in the area have soared in recent years.’’ Don Rennie

‘‘The price was a steal, and Dargaville’s median price has gone up by about $50,000 since I bought it.’’ Messini Palace

There are a variety of reasons why homeowners choose to rent. For some, like Rennie, the decision was accidental, prompted by the need to live elsewhere for work or family reasons.

For others, it is a deliberate strategy, known as ‘‘rentvesting’’. This is when someone who wants to get on to the property ladder buys a property in a place, or of a type, they can afford while they continue to live elsewhere because they have to or want to.

Opes Partners property economist Ed McKnight, who is also a ‘‘rentvestor’’, says the strategy has always been around but has grown in popularity in recent years due to increasing affordability issues.

Plenty of people in the 20s-to30s age bracket who live in places like Ponsonby, which they enjoy but cannot afford to buy in, look to cheaper areas, on the fringe of the city or in other regions, to buy, he says.

‘‘It enables people to get on the ladder, and they can rent out the property for a while and build equity, which they can then cash in to buy a home to live in, or use it as rental to build wealth.’’

There are real benefits, including greater financial security, that come with simply owning a property, he says.

‘‘We also work with people who live overseas who want a property for when they return and want to buy before they can no longer afford to. So there are different reasons for why people do it.’’

But Enable Me founder Hannah McQueen says it is a choice more people are making as they are priced out of some areas and look further afield for a solution.

Affordability, location and practicality all come into it, but ‘‘rentvesting’’ can also work well as a strategy to get on the property ladder for a few reasons, she says.

‘‘Taking on too high a debt load relative to your income will leave you struggling to get ahead and puts you on the back foot from the outset.

‘‘For example, if buying in the area you live in requires that you take on debt six times your household income or more, it’s time to look at a buy-to-rent strategy on a cheaper property elsewhere.’’

Many people overspend on renovating or decorating their own home, she says. ‘‘It’s money they won’t recoup, and if their goal is wealth creation, it often doesn’t stack up.’’

That is less likely to happen with a rental, but there are mistakes ‘‘rentvestors’’ can make too. It is important to choose your location carefully, she says. ‘‘A low buy-in price shouldn’t be the only criteria. You need to look for a location with potential for solid capital gains.’’

Additionally, if someone has ploughed their savings into KiwiSaver to buy a first home, that money is not available for them to use for an investment property, unless they live in it for a minimum of six months.

McQueen says that may be possible if the person is buying in the same city, but not if they are buying in another centre, although McKnight knows people who have done so to secure a more affordable property.

But most ‘‘rentvestors’’ are more in the mould of Auckland-based Messini Palace, who bought her first property earlier this year.

Palace wanted to buy a home in Auckland with a deposit she had saved working overseas, but soon realised she was priced out of the city. That led her to look further afield, and she ended up buying a good-quality, threebedroom house in Dargaville.

It cost her $417,500, and it sits on a section big enough to fit another house on, which gives her options for the future. It is an investment property now, but it

will be her mother’s forever home when she returns from overseas, she says.

‘‘The price was a steal compared to anything in Auckland, and Dargaville’s median price has gone up by about $50,000 since I bought it. That is a financial bonus, and gives me security. But I also see it as my retirement plan.’’

But new tax policies around rental properties could limit people’s ability to go down this path. In March, the Government announced it would extend the bright-line test to 10 years and remove the ability to deduct interest from rental income.

Economist Tony Alexander says these changes will put the kibosh on ‘‘rentvesting’’, although there are some exceptions for new-builds.

‘‘Young buyers have had this avenue to getting on the ladder all but denied to them. In fact, they may be more negatively affected by the bright-line test extension than any other grouping of investors.’’