Rentvesting is a property investment strategy that is gaining popularity in Australia, particularly among first-home buyers who are increasingly being priced out of their first-choice suburbs.
So, how does it work?
Rentvesting essentially involves renting in your preferred location while buying an investment property somewhere more affordable. It allows buyers to reap the benefits of owning a property while not giving up the advantages of living in an area they find more desirable.
The cornerstone of this strategy is that lower rental payments free up more money for other investments – either to help offset mortgage on your investment property, or to contribute to other wealth-creation strategies.
It has more advantages for those on higher incomes, both because of the increased borrowing power and the difference between outgoings and income.
Rentvesting is also more likely to succeed when there is a substantial difference between rents and house prices, as this will make it more likely to secure stable, long-term tenants.
Although rentvesting is a feasible alternative to being an owner-occupier straight off the bat, it’s not a strategy for everyone.
Let’s look at the pros and cons:
Pro – You Can Live Where You Like
Renting gives you flexibility and mobility, and the choice to live in an area which may be more convenient for work, study, family responsibilities, or access to transport and lifestyle.
Con – Less Stability
You may love the area you’re renting in, but if your landlord decides to sell or your lease is not renewed, you may have to move against your will. As a tenant, you have less control and rights than as an owner.
Pro – Start Sooner
Buying something now means you can purchase with a smaller deposit and you can buy before house prices go up – again. You also reap the benefit of watching your investment grow in value sooner, while building equity.
Con – You’re a Landlord
As a landlord you are liable for the expenses of an investment property – repairs, upkeep, council rates and other statutory expenses. You may encounter difficult tenants who damage your property or at the very least don’t maintain it to the same level that you would as an owner. You are also liable for capital gains tax when you decide to sell, although this would only apply for the period it has been tenanted (you always have the option of living in it yourself at some stage).
Pro – Tax Benefits
As the owner of an investment property, you can claim a number of tax deductions which can offset the expense of owning the property. Engage a properly qualified tax accountant to give you sound advice on maximising your deductions.
Con – You’re Still a Renter
The Australian dream of buying and living in your own home is still deep in our psyche and many are still not comfortable with the idea of owning a property they don’t live in. Others may still think of rent money as ‘dead money’ even though rentvesting may provide better long-term financial gains.
While rentvesting can help you enter the property market sooner, you should assess your finances to make sure you can afford to buy a property, and equally importantly, be able to cover the ongoing costs of owning a home
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