How to enter the property market

June 28, 2020

The Australian dream of entering the property market is not out of reach. Here we look at five options that could get you onto the property ladder sooner.

1. Rentvesting

The term ‘rentvesting’ is when you rent where you live and own an investment property which you rent out to someone else. Rentvesting allows investors to live where they want, enjoying the lifestyle of that location, with the owned property in a more affordable location. If you hold onto the property long enough, you may also benefit from capital growth and build up equity.

Rentvesting may mean you miss out on first homeowner government grants, but the benefits may outweigh the sacrifice. For example, if you negatively gear the property (when you pay more in property expenses than you receive in rental income) this allows you to use any losses to reduce your taxable income and improve your cash flow.

Ensure that rentvesting works in your favour by consulting a range of experts including:

  • An accountant to discuss investment property tax implications, including capital gains tax
  • A financial planner to advise on how to achieve long-term goals
  • A quantity surveyor to obtain a depreciation schedule outlining maximum deductions you can claim for wear and tear of the building structure and plant and equipment assets contained within the property.

2. Rent to buy / rent to own

Rent to buy means you agree with the owner of a property to lease from them until you’ve built enough equity to get a home deposit to buy it.

A timeline and agreed purchase price are usually stipulated in a lease agreement generally over two to five years, with the view that the rent you’ve paid reducing the final sale price when you’re ready to buy. You’ll usually pay above market average rent and an ongoing fee for the option to purchase the property by the agreed date.

The benefit of this type of agreement is that you have flexibility and can still change your mind at the end of the agreed term with no further obligations. Another benefit is that you can live in your future home and get a feel for the location without needing the deposit upfront. 

There are still risks to be aware of. As you’re not on the title of the properly, if you miss a payment or can’t acquire a home deposit before the agreed date, you’re likely to lose the property including the equity you’ve built up. If you get the home deposit, but the market has dropped and your agreed purchase price was above market value, you may end up paying an inflated price. Also, if the owner defaults on mortgage repayments, the lender has the right to repossess the home, so your agreement would be void.  

3. Buying land and renovating an older property

Another way to enter the property market is to invest in location. Purchasing land in a good position with an older style house, then renovating it may present an affordable option for you. It may also be a wise long-term investment if the land is expected to increase in value over time and you’re willing to hold onto it until that happens.

This also provides investors with the ability to claim valuable depreciation deductions for renovation works. Items you may be throwing out during renovations may hold valuable ‘scrapping’ deductions you can claim. It’s worth consulting a specialist Quantity Surveyor to discuss your plans before starting any renovation work.

4. Buying Rural

Another affordable way to enter the property market is to buy in a rural location. The property and lifestyle expenses can be much cheaper compared to city living and depending on your qualifications and where you’re willing to relocate. Depending on the state, there may be government or council subsidies available, such as Victorian state governments teachers grant offering up to $50,000 for those relocating to rural and regional schools in Victoria.

5. Buying property interstate

The property market in one area will vary greatly from another. For this reason, many investors consider purchasing properties in other states. This can be a lucrative way to enter the property market. The key is to do your research, particularly if investing in an area you’re not familiar with.

You can get additional support by engaging with a buyer’s agent to assist with:

  • Market research, suburb profile data including vacancy rates
  • Council development applications that may affect property prices or demographics in the area
  • Legislation you may be affected by, particularly sales and leasing contracts which can vary from state to state
  • Any additional charges that may apply within the state you’re looking at.

There’s many options for you to choose, based on your own situation. Good luck finding your next move.

Soho
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