Is Rentvesting Right For You?

Is Rentvesting Right For You?

Mark Taylor,

Many new buyers are now ‘rentvesting’, especially in the major cities, to maintain their lifestyle while getting on the property ladder. It may seem like a pragmatic approach to getting started however, with a bit of ingenuity and forward-planning, that dream home could be closer than ever.

Deciding if rentvesting is right for you will depend on your circumstances, including property prices and rents in the area you want to live in and whether you’ve identified a strong growth investment opportunity. So what exactly is rentvesting and how could it be the right investment strategy for you?

What Is Rentvesting?

Rentvesting occurs when a buyer rents their preferred home, which may be out of their price range, and buys an affordable property as an investment. They then use the income generated from the lease of their investment to cover the mortgage.

For some, this means renting a property of the size they require for their family, while purchasing an investment of a smaller size. For others, it means renting in a desirable location while investing in a property somewhere cheaper, perhaps even interstate or regionally.

It’s a great stepping stone to allow you to purchase a more suitable home in a few years, particularly in Sydney’s property with the median house price hovering around $1.1 million. 

Is It Right For You?

Rentvesting might be right for you if you don’t want to leave the lifestyle and community in a desirable location but can’t afford to buy there. It is particularly attractive to renters who work in Sydney but could comfortably service a mortgage on a house in a cheaper location.

Research conducted by the Property Investment Professionals of Australia (PIPA) in 2018 found that 36 per cent of first-time buyers had opted to invest in property and continue to rent instead of buying a home to live in over the past 12 months. Although there is a common belief that renting is always 'dead money', this really isn’t the case if you are renting as part of a sound investment strategy. 

Let’s say you’re considering buying a property around that average $1.1 million price point. Saving a 20% deposit would mean having $220,000 in the bank and then also covering stamp duty of over $45,000 and other purchasing costs. Your mortgage repayments could be upwards of $5,000 per month, not to mention the other costs of home ownership. 

It’s possible you could rent a similar property for considerably less, giving you more money to save and invest into a less expensive property. And, if you buy to invest, many of your costs, including potentially the interest on your mortgage repayments could be tax deductible too. 

Just keep in mind that there may be a gap between your rental income and the mortgage repayments on your investment that you’ll need to cover. Investment loans can also be more expensive, so you’ll need to shop around. 

Remember…before making any investment decision, it’s important to look at it from all angles and talk with your financial advisor or mortgage broker for advice on your particular circumstances.

Benefits Of Rentvesting

Rentvesting effectively lets you ‘try before you buy’ in the area you want to live in without delaying getting your first foot on the property ladder. Meanwhile, you can keep saving for your dream home while your investment property is building wealth. 

Renting offers the flexibility to move when you want and frees you up from the maintenance hassles and costs of home ownership. It also allows you to make a smart and strategic property investment decision without the emotional pull that can come from buying a home to live in. For example, if you identify an area that’s potentially high growth due to a new transport link or other major services in development, but which you don’t want to live in right now. 

What Do I Need To Get Started?

An investment property is different to a home and should be treated as such. It’s important to do your research. If you are looking to purchase in a location with which you are unfamiliar, study the property figures for that area or seek professional advice from a local agent. Ideally look for a property in an area with high rental returns, and with a likelihood for sales figures to increase in the next few years.

You will need to have accumulated a deposit, although it is likely to be smaller than the amount you would need to buy your ideal home, and you will need to provide the usual confirmation to a bank or home loan lender that you will be able to service the mortgage.

What Are My Obligations As A Landlord?

Your obligations as a landlord differ from those of a homeowner, and may include council taxes, strata fees, letting agent fees, and the cost of repairs and maintenance. It is important to take these costs into account when calculating your financial obligations.

Tenant-investors are also subject to the same legalities as other investment property owners, including the perks of negative gearing and the burden of capital gains tax. Likewise, income received from the investment property is treated as taxable income.

It may also take time to get tenants into the property, so make sure you have the means to service the mortgage without rental income, at least for a short time.

Like To Learn More About Rentvesting?

Contact our team of specialists today.

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