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Homework reaps rewards for growing renter-investor group.

02/06/2011

The rise of the first homebuyer as ‘renter-investor’ demonstrates borrowers’ savvy approach to getting a foothold in the property market without compromising lifestyle, but a leading mortgage advisory group cautions borrowers to be vigilant.

Smartline Personal Mortgage Advisers’ Managing Director, Chris Acret, says lifestyle had always been a priority for young borrowers in particular, but they were now willing to explore options beyond the first homeowners grant to balance property ownership dreams and lifestyle.

Renter-investors, a term coined by several leading property commentators*, refers to generally young buyers who choose to purchase an investment property instead of their first home.  It may be that they cannot afford to buy in lifestyle areas, such as popular beach and inner city locations, but they also do not want to live where properties are cheaper.

Mr Acret says these buyers are faced with opting out of property ownership and renting for the foreseeable future or buying as an investor.

“We are certainly seeing a shift in borrowers’ thinking – particularly first homebuyers, who are thinking outside of the square and, in some cases, foregoing the first homeowners grant in order to get into the property market,” he said.

“Not only do people want to live in areas that suit their lifestyles now – near beaches or cafés or in inner city lifestyle suburbs – but they’re also keen to live close to their workplace so the commute to and from work doesn’t eat into their valuable personal time.

“With the cost of properties located in these ‘lifestyle areas’ out of reach for many first homebuyers, they’re taking a more creative approach.”

Mr Acret said that while all borrowers needed to have a clear strategy and structure their lending accordingly, this was of particular importance for first-time renter-investors.

“There are a number of considerations that first-time property investors need to think about,” he said.

“For example, what is your strategy? Are you looking to buy and sell an investment property within five years or are you planning to purchase and keep it as an investment offering growth over a long-term period of, say, 10 or 20 years?  Will you then draw equity from it to use as a deposit for a home or another Investment property in the future?
“It’s important to do your homework – ask yourself why and where you’re going to buy your investment property, and what the expected capital growth rates and rental returns will be in the areas you’re looking to purchase.

“The answers to these questions allow you to run projections of what sort of gains you could expect to make if you sell in the future.

“Of course you would also need to consider a range of costs including buying and selling expenses, capital gains, tax implications, and fees for professional advice.”

Mr Acret said that property investors also needed to consider a range of factors that were best discussed with their mortgage advisor first and then with their accountant.

“For example, if you purchase an investment property with a view to selling it within, say five years, you will have to pay capital gains tax,” he said. 

“Conversely, if you’re going to hold the property for a longer period of time and draw on the equity to fund a home or additional investment properties, then you won’t need to pay selling costs and capital gains tax and, as such, your mortgage broker can help you to structure your lending to suit.

“There are also a range of options available to minimise cash flow shortfalls when owning an investment property, such as making interest only payments, maintaining depreciation schedules, conducting regular rent reviews, and having tax adjustments paid back to you monthly.

“Borrowers should discuss this with their mortgage advisor and accountant so they can structure their lending and finances to their advantage.”

Mr Acret said the renter-investor approach was not just for first homebuyers.

“Our living circumstances can change for a host of reasons,” he said.

“You may have received a job offer that requires you to move to an inner city location or you may just want to live in a suburb that offers the lifestyle you and your family desire, now. As a result you may decide to rent out your home and make it an investment property. 

“Likewise, you may live in an area that is currently achieving good capital growth and yielding excellent rental returns for homes like yours, so you decide to rent a smaller property elsewhere in order to rent out your existing home.

“There are a range of reasons for choosing to rent while putting your owner-occupier property on the rental market.”

Mr Acret said lenders were also keen to captilise on the renter-investor trend, with a number now offering investment loans on 5% deposits.

“Regardless of your unique circumstances, the advice of a quality mortgage adviser can prove invaluable to help you structure your lending and get the most out of your investment strategy,” Mr Acret said.


Smartline offers these tips for would-be renter-investors:

  1. Do your own homework and establish your strategy, property purchase and investment goals.
  2. Discuss these with your mortgage advisor first and then your accountant.
  3. Make a decision about your strategy and seek advice from your mortgage broker to develop a lending structure to complement your investment strategy.
  4. Conduct regular reviews with your mortgage advisor and accountant.

 

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