More Australian first-time home buyers are turning to rentvesting as a stepping-stone to achieving their dream homes. Find out if this strategy is right for you.
Housing affordability across Australia has reached its highest level in decades, which should be welcome news for many aspiring homeowners looking to purchase their dream house.
However, in capital cities, where most people work and aspire to live because of the modern conveniences these places provide, the price difference between buying and renting a home remains significantly high.
This price gap has given rise to a savvy investment strategy called rentvesting, which has been gaining traction these past few years.
How does rentvesting work?
“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,” says 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.”
According to Yardney, the strategy works because even though the property owner is renting, the house they 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 rentvesting?
1. Getting on the property ladder sooner
Rentvesting allows aspiring homeowners to enter the housing market sooner as the properties they buy often require a smaller deposit. This is as opposed to delaying their home-buying plans for several years to save enough for their dream homes.
2. Building wealth to save for your dream home
Property investments provide a great opportunity to generate wealth, allowing owners to save for their dream homes.
3. Living where the action is
Rentvesting allows investors to live where they want and not be restricted to where they can afford to live.
4. More room for flexibility
Because there are fewer strings attached, renters can easily move from one home to another depending on their circumstances.
5. Tax benefits
The Australian Tax Office (ATO) provides property owners a range of tax deductions that can help minimise their annual tax bills. Sometimes, this could spell the difference between positive cash flow and negative gearing.
What are the disadvantages of rentvesting?
1. Missing out on FHOG
Entering the property market as an investor rather than an owner-occupier will mean missing out on the First Home Owners Grant (FHOG), which has strict eligibility criteria.
2. Less security
One of the downsides of being a tenant is that there is less security in their primary residence. They may need to make the property they are renting available for open inspections. They may also need to vacate the property if the owner decides to sell it.
3. Homeownership costs
Owners are often responsible for the costs of management and maintenance of their properties. This may cost them more in the long run, especially if their rental income is less than homeownership costs.
4. Capital gains tax (GCT) liability
Selling investment properties entails paying tax on capital gains. In contrast, selling owner-occupied properties do not require payment of CGT.
Things to consider before rentvesting
As with other property investment strategies, rentvesting requires investors to be financially prepared. They will still need to spend for the usual costs associated with purchasing a property, including deposit, stamp duty, LMI, and other legal, and bank fees.
Rentvestors should also be able to afford their rent while ensuring their monthly mortgage is covered. Additionally, there are several costs involved in the management and maintenance of their rental property, so it is best to have some resources set aside to cover for these.
Investing in the right location can also pay dividends. Areas with good capital growth potential is best for investors who are rentvesting as a means to secure their dream homes. For those planning to become long-term renters, a location with a potential for strong rental return is more suitable.