In light of rising property prices and increasing difficulty for new buyers, alternative options for entering the Australian property market are becoming more common. One such option is ‘rentvesting’.
The term might sound confusing, even counterintuitive at first – but there’s a reason many Australians (young people especially) are choosing this method of property ownership.
WHAT IS RENTVESTING?
Rentvesting involves renting a place to live while simultaneously owning an investment property.
This disrupts the traditional order of property ownership: renting, then purchasing your own home, then (after some time) considering the possibility of an investment property.
Rentvestors opt to skip the homeowner step, purchasing their first property as an investment rather than an owner-occupier dwelling.
WHAT ARE THE BENEFITS OF RENTVESTING?
In many ways, rentvestors enjoy the best of both worlds.
Some of the most prominent benefits include:
ABILITY TO MAINTAIN DESIRED LIFESTYLE AND LOCATION
Due to housing affordability issues, those who choose to purchase their own home first are rarely afforded the luxury of choice. Most compromise with a less-than-ideal location or property type, simply because that is all they are able to afford.
However, when your first property purchase is an investment, you are free to continue living a lifestyle more suited to your preferences. By choosing to rent instead of own, rentvestors can live in a desired location where prices may be too high for home ownership.
With your investment property’s mortgage all but taken care of by the rent from your tenants, you can freely maintain the lifestyle you choose, wherever you choose to live it.
Homeowners trying to pay off a loan may find themselves feeling stuck in their location or property due to being tied down to a mortgage.
As a rentvestor, you have more flexibility to move around as it suits you, as the only mortgage you’re paying off is the one on your investment property. Plus, the costs, efforts and time involved in moving between rentals is often significantly less than the selling and repurchasing process.
ENTRY INTO THE PROPERTY MARKET
Rentvesting allows you to gain a foot in the door of the property market without the burden of a crippling mortgage. By purchasing a property better suited to your budget, you’re more easily able to overcome the financial worries faced by most first home buyers.
Rentvestors also gain an advantage by owning value-growing assets, which can later be sold for capital gain.
TAX BENEFITS, EQUITY AND WEALTH
There are numerous tax benefits involved in being a property investor. You can claim tax deductions for many of the costs involved in owning a rental property (more tips on this here).
Investors are also able to make the most of negative gearing – a situation in which the costs of owning your investment property exceed its rental income. The difference can be claimed as a loss against your income at tax time.
Owning an investment property also allows you to build up equity and wealth, which can be put towards the purchase of future properties – whether these be additional investments or a home of your own.
WHAT OTHER CONSIDERATIONS SHOULD I BE AWARE OF?
Before you jump straight into searching for investment properties, there are some further aspects of rentvesting you should be aware of.
Be sure to keep the following in mind when considering this approach.
IMPORTANCE OF PURCHASING AN EFFECTIVE INVESTMENT PROPERTY
It’s not as simple as just purchasing any affordable property as an investment. Thorough research must be undertaken to ensure your investment property has capital growth potential and will meet your financial needs and goals.
BEING A LANDLORD
Don’t forget that being an investment property owner also means being a landlord. You are responsible for everything this entails, including maintenance and repairs on the property.
You’ll either need to deal with tenants yourself, or enlist property management services.
SECURITY OF TENANCY
Owning and living in your own home is usually a more secure living situation than renting. It’s important to remember that unless you are on a fixed term lease, you are not necessarily guaranteed continued tenancy in a rental property.
SECURITY OF RENTAL INCOME
Keep in mind that you’ll be responsible for covering costs should your rental property ever be vacant. If you have trouble finding tenants, it can create a sense of instability in your rental income – and therefore in the mortgage repayments for your investment.
CAPITAL GAINS TAX
Should you choose to sell your investment property in the future, be aware that any profit from the sale will be subject to capital gains tax. An owner-occupied home is exempt from this tax.
If you’re interested in taking the rentvesting approach, here are some things to consider before buying your first investment property.