To rentvest, or not to rentvest, that is the question
Owning your own home has been a staple of the Australian dream for years. However, in recent times it has become harder for prospective home buyers to get a foothold on the property ladder.
With a traditional owner occupier method seemingly becoming more and more unobtainable for young people, the option to rentvest has become an attractive prospect.
What is rentvesting?
A strategy that is growing in popularity, rentvesting is when a hopeful home owner buys a property that fits their price range and rents it out. Simultaneously they will rent a property in a suburb where they desire to live that is not in their buying price range.
This is done as opposed to the traditional methods of looking to purchase a property as an owner-occupier or a traditional investment property.
For example, if your desired property is in the inner suburb of your state’s capital, chances are purchasing a home has become a difficult proposition thanks to the rise in unaffordability. When using rentvesting as an investment strategy, an investor would rent the property they wish to live in while purchasing a property in a suburb where prices are not as high.
The purchased property will then be rented out, with the proceeds used to cover your own rental costs while at the same time forming your own investment portfolio.
Positives of rentvesting
Rentvesting as an investment strategy can be very successful under the right circumstances.
Firstly, through rentvesting a prospective investor can enter the property market sooner. With a smaller deposit required there is a shorter time needed to save up.
This strategy also allows a person to live the lifestyle that they desire. Renting in the suburb that you want means you won’t be saddled by the hefty mortgage that comes with it. This does depend on whether the rental prices are affordable though.
Another benefit that comes with rentvesting is that it can allow an investor to accumulate wealth for the future. In turn, this can aid in saving for a deposit if becoming an owner-occupier is a desired goal.
There is also a level of flexibility that comes with rentvesting, specifically the renting side. If you don’t like the suburb that you are living in, the process for changing is far more flexible than when you are locked into a mortgage.
Rentvesting also has other financial benefits. Being an investment property owner, you will be eligible for the tax benefits that come with owning an investment. Tax benefits such as claiming deductions on interest payments on your investment property loan.
Other tax benefits can also include:
No tax paid when withdrawing from equity loan.
Deductions can also be made on things such as advertising for tenants and general maintenance.
Negatives of rentvesting
A primary negative that comes with rentvesting is that you will be paying a mortgage as well as rent. This means that you will have to be extra strict when it comes to budgeting.
The rent that you receive from your investment may cover your mortgage but only part of your rent, or vice versa. This does potentially leave you open to negatively gearing your property as you would be making a loss.
Another potential negative that may bother rentvestors is that, while you are living in your desired area, you do not own the property and are therefore not free to make improvements or undertake renovation projects.
Even a basic coat of paint that may brighten up the interior is not an option for renters without permission.
There are also some old-fashioned stigmas that are attached to renting such as rent money is dead money and that renting is throwing your money away. These can influence the potential decision to be a rentvestor.
In the modern property market, outdated ideas like these are just not true though. Thanks to rising property prices in the capital cities of Australia, investors are needing to be more innovative when growing their portfolios or to gain a footing on the property ladder.
Rentvesting can also lead to some people putting their blinders on in regard to finance. Investors can become so fond of the idea of living in their desired suburb that they ignore that it is not viable to rent there and have an investment somewhere else.
Is it right for you?
There is no one size fits all method when it comes to investing in property. There are different strategies that will work for different people that are at different stages of their lives. For the best results for your portfolio, spend plenty of time researching to allow you to make an informed decision.
Ensure that, if you do decide to be a rentvestor, it is a strategy that you can afford. An investment property being cheaper than your dream home does not automatically make it affordable.
Likewise, never take out a mortgage out of desperation to gain a foothold on the property ladder. Renting can sometimes feel like you are just losing money but in the modern Australian property market expectations need to be tempered.
Consider your own financial situation carefully too and talk with a financial expert about the matter.