The Rise of Rentvesting
For many, the cornerstone of the Great Australian Dream is still to own their very own home. However, rising property prices in many parts of the country is leading many young Australians to consider rentvesting when buying for the first time.
What is rentvesting?
Rent-vesting is a home owning strategy which enables you to rent a property that suits your lifestyle while owning an investment property that’s fits your budget. Typically, rentvesters do this in order to live in a property they couldn’t afford to buy and buy property they can afford but do not want to live in and subsequently rent it out as an investment property.
Here’s how rentvesting works:
Say you want to buy a four-bedroom home in Brisbane’s inner city, but the property prices in the area are out of your reach. The solution to the problem would be to rent the ideal home where you want to live, and then buy a property in a suburb where prices are more affordable.
The property you do buy can then be rented out to help cover your own rent and later sold for a capital gain. Therefore allowing you to have the lifestyle you want now, while at the same time building a property portfolio for the future.
Another example of this strategy would be using the difference in rental payments to mortgage repayments as money to invest with. For example if your dream home leads to mortgage repayments of $4,000 a month in comparison to rental payments being $2,200 a month, you are left with an additional $1,800 left to invest per month.
Rentvesting allows you to use renting as a part of an effective overall investment strategy despite the traditional views on “rent money being dead money”.
Rentvesting: Pros & Cons
PROS
- Enter the property market sooner. Rentvesting allows you to break into the property market sooner with a smaller deposit rather than waiting until you are able to afford your dream home.
- Live the lifestyle you want. Rental prices prevailing, you can live in your dream home now and not have to compromise on what you want as well as not having the commitment of a huge mortgage.
- Building wealth. You are able to begin building your investment property portfolio, therefore generating wealth for you and your family in future.
- Save for your dream home. Owning an investment property allows you to save to buy your dream home.
- Flexibility. You are able to upgrade, downgrade, experience living in different areas. As well as amend your situation if circumstances change with no stamp duty expenses or legal costs.
- Tax benefits. You can claim interest payments on your investment property loan as a tax deduction.
- Choose where to invest. Where you want to live and the best place to buy an investment property often won’t be the same, so rentvesting allows you to take the emotion of out buying property as an investment.
CONS
- Buying an investment first. This move can feel counter-intuitive for some people.
- Dead money. The old adage that “rent money is dead money” may be a deterrent for some people considering this approach.
- You don’t own your home. This can be especially difficult if you form an emotional connection to a house but then the landlord wants you to move out.
- You can’t make it your own. Although a rental property might be vastly improved by a renovation project or simply a fresh coat of paint, remember that it’s not yours to tinker with.
- You can lose access to first home owner grants. Rent-vesting can also void your eligibility for two of Australia’s biggest first home buying subsidies, the First Home Owner Grants (FHOG) and the First Home Loan Deposit Scheme (FHLDS).