It has often been said that if you cannot afford to buy a home in an area you want to live in, you should purchase one in a more affordable area, let it, and use the income to pay rent for a property where you want to live.
And this, says property investor Ben Malapile, is “great advice”.
As with most things though, there are pros and cons to this method of property investing.
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“Most cons come from buyers buying without doing their sums. They buy, place a tenant, but then realise that there is a shortfall every month that has to be paid because the monthly rental doesn't cover the monthly expenses.
“Property can be very unforgiving if you buy wrong. Hence, you make your money when you buy, not when you sell.”
If you buy right though, you can start to accumulate extra income every month that will help you to buy in the area where you are renting. Soon you can grow a portfolio of properties, he says.
But you must buy using your calculator, not your heart.
“Run your numbers rigorously before placing an offer. Budget for vacancies, fixed costs such as the bond, levies, as well as rates and taxes that are still payable whether you have a tenant or not.”
Aspiring property owners should avoid over capitalising on properties in the hope of getting higher rents than the current market rates, Malapile adds.
Just Property chief executive Paul Stevens agrees that buying in an area you can afford while renting in one you love is a good idea. This is especially the case if the property you own is one you can move into if your circumstances change and you cannot afford a monthly rent on top of your bond and other property-ownership costs.
Like Malapile though, he also urges such buyers to make sure they can adequately cover their property-ownership costs with the rent they can charge, including monthly rates and taxes, insurance, security, and connectivity costs.
“You can achieve this by renting the property for short-term rentals (if allowed) as the rent you get is usually higher than long-term rentals. Alternatively, you may want to consider multiple tenants sharing the property – landlords in student/university towns have done this for many years.”
You should also thoroughly research the market conditions and ensure there will be demand for the type of property you are considering, and that there will be value appreciation over time.
Another idea is to consider shared ownership to spread your risk and/or increase your affordability.
“Some banks will allow up to 12 people to finance a single property,” Stevens says.
“If you do this though, you need to run this carefully as a business, with clear rules and ways of working.”
The advantage of buying in a more affordable area than where you want to live, says Grant Smee, managing director of Only Realty, is it allows you to enter the property investment market, get a foot on the ladder, and have a tenant pay for the property.
“The negative aspect would be if your tenant didn’t pay their rent, you would need to cover the bond payment. In addition, there are costs of ownership that may not be covered by the rent, for example, maintenance, levies, rates, and taxes, so it is important to budget for these items.”
He also warns that humans are generally optimists, only seeing the upside when considering investments and returns.
“Aspiring property owners need to plan for the worst and make sure they are able to cover the cost of owning the property should a tenant not pay, or the property sits vacant for extended periods. Additionally, unforeseen costs such as special levies, or insurance excess on claims need to be factored into their decision making when investing into the particular unit.”