Rentvesting can be an invaluable and astute strategy when applied correctly, so this week we’re exploring what rentvesting is, when you might want to consider it and what the pros and cons of such a strategy are. Rentvesting could just be the strategy that achieves your financial goal of home ownership sooner than you may have thought possible.
What is Rentvesting..?
Rentvesting is a scenario whereby you purchase an investment property that you plan to rent out to a tenant, while you rent the property that you reside in. While this may sound counter-intuitive to some, we’ll explore some real-life examples where this could add tremendous value.
This is a popular strategy, particularly amongst younger couples and singles looking to get onto the property ladder but finding the entry price of the property that they’d like to live in or area that they prefer out of reach financially. Given that home prices have risen particularly in inner-city areas, that are close to the workplaces of many, rentvesting has become a very popular strategy.
Pros of Rentvesting
There are many benefits to such a strategy, which we’ve outlined below:
- Live in your preferred location: You may find that the area you’d like to reside in at the moment just isn’t affordable to buy, or it may even be a poor choice for an investment depending on your own preference and situation. In this case, you may find that there are plenty of options to rent in that area.
- Flexibility of location: One of the key benefits of any rental strategy is that you can pick up and move quite quickly. If you change jobs, relocate to another area, city or country, or your partner is relocated, you can easily shift without needing to worry about selling your home or renting it out.
- Tax benefits: Negative gearing is one of the key benefits of the Australian tax system for property investors who decide to rent out their property. This allows you to claim the deductions for any cash flows associated with the property such as property management, repairs, maintenance, body corporates fees, as well as the non-cash deductions such as the depreciation of the building costs and fixtures/fittings. You may find that this allows you to realise the tax benefits on a regular basis and boost your regular cash flow.
- Building up a portfolio: You may decide to continue with the rentvesting strategy and add further investment properties to the portfolio. This could in some instances compound the tax benefits and allow you to continue to grow your asset base.
- Rental income: Rental income over time will typically increase for most properties, which provides a regular and predictable cash flow. Depending on your personal financial situation, this may form part of your long-term retirement plan. It’s important to seek proper financial advice here to review your situation.
- Borrowing capacity limitations: You may also find that you simply can’t borrow as much as you would like to afford the home you’d like to live in. This could be due to high regular expenses, starting a family or otherwise, which could stand in the way of you achieving your goals. Rentvesting may be a solution to such a limitation.
Cons of Rentvesting
As with most strategies, there are some cons to the rentvesting strategy, which must be taken into consideration before embarking on this journey, which we’ve outlined below:
- First Home Owners grants: The first home owner grants and concessions wouldn’t be available for somebody looking to purchase an investment property. Depending on the price and location, this may be a significant consideration that you need to factor in.
- Tax implications on capital growth: If your investment property does grow in value and you decide to sell it, this may create some exposure to Capital Gains Tax (CGT), whereas your own home would typically be exempt from Capital Gains Tax. Remember to consult your accountant about your own situation and how this could impact you.
- You’re the tenant: Being a tenant could mean some uncertainty for some people, depending on your own situation. If the landlord decides to sell the property or make changes, then this may mean that you have to find another home. While this won’t be an issue for everyone, it’s important to consider.
- Rent vs. mortgage repayments: This is a common one that we often hear that everybody would much rather be paying off their mortgage than paying rent, or that they’re ‘sick of paying off somebody else’s mortgage. Quite often, they’re failing to include the interest on the mortgage that would also need to be paid in the event of purchasing a property and taking on a loan. In some cases, the cash flow could be substantially different between scenarios so it’s important to run your numbers and assess what’s best for you.
If you’re a young couple looking to get your feet onto the property ladder, we would certainly suggest doing your homework on this strategy and speaking with a team of investment-savvy mortgage brokers to review your options. You may find that this provides you with the kickstart that you require.
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