Housing unaffordability continues to be the biggest barrier preventing many aspiring homeowners from securing a property in many of the country’s most desirable suburbs. The price difference between renting and buying a home in capital cities is still significant. This is because many people live there and are able to access modern conveniences.
Many first-time homebuyers have turned to smart investment strategies to help them achieve their dreams. This strategy is known as rentvesting and has grown in popularity over recent years.
How does rentvesting work
Experts say rentvesting is a way to own a property while renting out a home you don’t want but can afford.
This allows you to live in an area that is not financially feasible for buying a house, while still owning a property in a suitable location.
“Essentially, the rent and invest strategy is to buy an investment property first where you can afford to and rent where you want to live but probably can’t afford to,” wrote Michael Yardney, chief executive officer of Metropole Property Strategists, in his property update blog. “It’s a tactic that overcomes financial obstacles and exorbitant property prices because you can buy in a location that fits your budget and then rent in a location that suits your lifestyle.”
Yardney added that rentvesting is an effective homeownership strategy because even though you continue to rent, the house you bought could potentially rise in value, particularly if it is in a “smart location,” and part of the cost is being paid off by the tenant.
What are the benefits of rentingvesting
Some experts say that one of the biggest advantages of rentvesting is that it gives you “the best of both worlds.” The strategy allows you to buy a home and rent it out to cover some of your homeownership costs, while continuing to live in an area that suits your lifestyle. Rentvesting can also be used to fund your rental expenses if your investment property is making a profit. Here are some other benefits to rentvesting.
1. This helps you to get on the property ladder quicker
Rentvesting allows for you to get into the housing market earlier because the deposit required for the property you buy is often smaller. This is in contrast with putting off home-buying plans for many years, because you don’t have enough savings.
2. You can build wealth and save for your dream house.
You can make a lot of money by investing in property.
“The number-one advantage for me is that it’s like a forced saving, in that having an investment property whilst you rent focusses your attention on wealth creation rather than buying expensive things for your own home,” said Luke Harris, property expert and co-author of property investing book Let’s Get Real. “At the same time, you are already building equity with the investment property you have purchased.”
3. It’s possible to live right where the action happens
Rentvesting allows you to rent in areas where purchasing is difficult due to rising prices. Rentvesting allows you to rent in an area with a reasonable rental price so you can take advantage of it without having to pay a large mortgage.
4. There’s more room for flexibility
Renting allows you to easily downsize or upgrade to another home, regardless of your financial situation.
5. A host of tax benefits are available to you
The Australian Tax Office offers a variety of tax deductions to property investors that can reduce your annual tax bills. This can sometimes make the difference in positive cash flow or negative gearing.
“Of course, your own home is not tax-deductible, and so rentvesting may give you tax benefits that you wouldn’t otherwise get which gives you the chance to build your portfolio faster,” Harris said.
What are the pros and cons of rentingvesting?
Rentvesting has its own set of disadvantages. These are just a few:
1. FHOG is something you will not get.
You will not be eligible for the First Home Owners Grant (FHOG) if you are an investor and not an owner-occupier if you enter the property market.
2. You have less security
A downside to being a tenant, is the fact that you have less security at your primary residence. You may have to make your rental property available for inspections, or vacate it if your landlord decides that you want to sell.
3. You should also consider the homeownership cost.
You, the owner, are responsible for managing and maintaining your investment property. You may pay more over the long-term, especially if you have a lower rental income than homeowners.
4. Capital gains tax liability
You must pay capital gains tax if you sell an investment property. However, the CGT payment is not required for the sale of an owner-occupied home.
What are the factors you should consider before rentingvesting?
Rentvesting is like any other property investment strategy. You need to be financially prepared. There will be costs for deposit, stamp duty and lenders mortgage insurance.
Renters must be able to cover their monthly mortgage while still being able to afford rent. There are many costs associated with managing and maintaining your rental property. It is best to set aside a budget for these expenses.
The right location could also be a good investment. If you rentvest with the intention of purchasing your dream homes, it is best to choose areas that have high capital growth potential. An area that offers strong rental returns is a better choice if you intend to be a long-term landlord.