Over the last decade, rentvesting has become an increasingly popular strategy for those looking to break into the property market. While it is widely seen as being counter-intuitive to traditional investing wisdom, this approach can offer a range of benefits. Most significantly, it provides a higher level of flexibility, which a lot of investors – particularly younger ones – find quite attractive.
Here we take a closer look at how rentvesting works and why it has become so widespread. As part of this, we will examine the unique appeals of this approach and who it best suits. We will also explore the additional considerations rentvesting creates and why it’s not for everyone.
What is rentvesting?
At its core, rentvesting is choosing to prioritise buying an investment property over buying a home to live in. On a practical level, it involves buying an investment property while continuing to rent, usually in a different location.
Generally, rentvesting is seen as a lifestyle choice, as it allows investors to continue living in their preferred location. However, it can also be a financial choice, as it places the focus on maximising growth potential and rental returns. That said, rentvesting also creates a range of financial and logistical considerations that need to be carefully managed.
Rentvesting pros and cons
Depending on your situation and investment goals, rentvesting could provide a range of benefits. This includes:
- Giving you greater choice in where you live and buy: When buying a property to live in, the location will be determined by your budget and practical requirements. This will often require you to make significant compromises to find a location that works both logistically and financially. However, rentvesting allows you to live where you want and buy in an area that suits your investment strategy.
- Allowing you to get into the market sooner: When buying a property for yourself, there will be a minimum budget you require to get what you want. But when buying an investment, you can consider more affordable options, like those located in outer suburban and regional areas. As such, as a rentvestor, the deposit you need to buy your first property will generally be smaller.
- Reducing maintenance costs: When you own your own home, if anything needs to be repaired or replaced, you need to pay for it. But, as a rentvestor, if anything needs to be fixed at your primary residence, it is the landlord’s responsibility. You can also engage a Property Manager to coordinate maintenance of your investment property, which will usually be tax deductible.
- Providing a range of tax benefits: Many of the costs associated with owning a rental property are tax deductible. In addition to maintenance, you can claim property management fees, council rates, insurance premiums, and a range of other expenses. These costs can be used to offset your regular income and reduce the amount of tax you need to pay.
- Creating the potential for additional income and capital gains: The whole point of an investment property is to provide short-term income and/or longer-term capital growth. If positively geared, your investment property will generate extra regular income, which can help cover your rent costs. Most properties also increase in value over time, giving you extra capital to invest or put toward your own home.
Like any investment strategy, rentvesting also has its risks and potential drawbacks. This includes:
- Reducing the security of your primary residence: As the initial term of a lease is usually 12 months, renters generally need to move more often than homeowners. There are also a range of reasons a landlord can request a tenant to vacate their property. As such, compared to owning your own home, renting provides significantly less stability, particularly over the longer term.
- Increasing your exposure to market conditions: As a homeowner, interest rate rises can increase your regular mortgage payment amount, requiring you to stretch your budget further. Similarly, as a tenant, rent increases can also require you to find extra space in your budget. As a rentvestor, you are susceptible to both of these increases, which often occur at the same time.
- Limiting your ability to access the First Home Buyers Assistance: The NSW Government provides a Grant of $10,000 to first-time buyers purchasing newly built or sustainably renovated properties. They also offer a reduced rate of transfer duty for first-time buyers spending up to $1,000,000. However, as you need to live in the property to be eligible, this assistance is not available to rentvestors.
- Creating the potential for capital losses or an increased tax liability: While properties generally increase in value over time, the market can be volatile, and it is possible to lose money. And, even if you do end up making a profit, any additional income generated will be subject to tax. As with any capital gains, you realise when the time comes to sell the property.
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It is worth noting here that some homeowners become rentvestors by changing their primary residence into an investment property. While this does help address some of the issues associated with this approach, it can also limit the benefits. For example, if your home is not in a strong investment area, your rental yields may be lower.
Acknowledging this, if you are considering becoming a rentvestor, you seek professional advice on the potential financial implications. You should also focus your investment property search on areas with a proven history of strong rental returns.
Want to discuss this further?
If you are considering rentvesting or would like more information on this approach, contact Local Agency Co. today. Our experienced team can advise on picking the perfect investment property, securing your dream rental, and choosing a great tenant.