If you have been following our newsletters lately you would probably have noticed the term ‘rentvesting’ in recent newsletters. It’s not a term we made up but a buzzword for an alternative way of getting into the property market and achieving property ownership.
So what is rentvesting?
Rentvesting is simply renting where you want to live (typically in an area you love but can’t afford to buy in) and buying an investment property in a more affordable suburb to rent out.
Just like any investment strategy, there are pros and cons that should be considered.
THE PROS
Live where you want, while still getting your foot in the door of the property market
Rentvesting allows you to live where you want to live and invest where you can afford, enabling you to get into the property market sooner using a lower deposit.
Freedom and flexibility
Let’s face it, when you’re young, perhaps without any kids, the ability to move around as you please is very desirable. This could be to a different suburb, state or even country. Renting allows you to do that (within the terms of your lease of course).
Tax incentives
Property investors have the benefit of being able to tap into numerous tax benefits, which aren’t available to owner occupiers. Tax deductible expenses include advertising for tenants, repairs and maintenance, home insurance, and water and council rates.
The opportunity to build an investment portfolio
If the rent being paid by your tenants is more than your loan repayments, you will benefit from extra income. This could enable you to reinvest these extra funds elsewhere and use it to grow your property portfolio at a much faster pace than if you were waiting for a property to appreciate in capital growth.
THE CONS
Being a tenant
A rentvester is in the unusual situation of being both a tenant and a landlord. As a tenant you must deal with regular inspections and the uncertainty of having to move should the owner decide to sell. Furthermore, as your home is not your own, there are restrictions on what you can and can’t do to it to make it how you want it to be. If you are looking for a long term permanent home for the security, then rentvesting would not be for you.
Paying off someone else’s mortgage
Many people refer to rent money as ‘dead money’ because it is essentially helping the landlord pay off their mortgage. If you can’t bear this thought then reconsider rentvesting. The whole premise behind it is to live where you want to live and buy where you can afford, so it requires a change in mindset.
Time consuming
Being a tenant and a landlord simultaneously can be time consuming. Having a good property manager will make it much easier and far less stressful.
You will miss out on the FHOG
The First Home Owner Grant (FHOG) is only available to first homebuyers who are buying an established or building a new home to live in themselves. So if the first property you buy is an investment property you will forfeit your eligibility for the grant. Click here for more information on the FHOG eligibility requirements in WA.
You may be up for Capital Gains Tax
When you sell your investment property, you will have to pay Capital Gains Tax (CGT) on the profit margin unless you live in the property for 12 months before selling it.
How to rentvest successfully
Successful rentvesting requires you to do some research before you jump in. Analyse the average rental returns and capital growth predictions of a median priced investment property in a suburb you are considering investing in.
Once you’ve done that, compare this to the rental returns and capital growth of the property you want to live in/rent (in the more expensive area).
If the sums and lifestyle advantages don’t add up, reconsider the idea of rentvesting. But if you love where you live and want the freedom and flexibility to move around before you settle down without sacrificing the chance to get your foot in the door of the property market, give rentvesting some serious consideration.
Everyone’s financial situation is unique
Always seek independent financial advice before making a decision of this magnitude.