You’ve saved enough for a home loan deposit, but not enough to buy a property in your dream suburb. You’re now faced with the choice between continuing to save so you can live where you want or buying an affordable property in a less desirable area to get a foot on the property ladder. So, what do you do?
This is a common problem facing many Australians who have yet to enter the property market. With house prices having risen at astronomical rates, saving enough for a minimum home loan deposit in many capital cities has become out of reach for many.
Fortunately, there is a strategy that can help first home buyers to get a leg up on the property ladder.
Buying an investment property first
Rentvesting is becoming an increasingly popular home-owning strategy. Rentvesting is when individuals purchase an investment property in an area they can afford, whilst renting a place where they want to live but can’t afford to buy.
As a first home buyer you may not be in the financial position to purchase a home in the area you necessarily want to live in. For instance, you currently rent an apartment in Sydney CBD, work in the city and your social life consists of living in the city, but you cannot afford to purchase a home in that area. You could continue to save for a deposit, hoping one day you save enough. Although, this may take many years or even become impossible due to the constant surge of home prices.
Alternatively, you could rentvest. This option gives you the opportunity to get into the property market whilst keeping your lifestyle.
Let’s say you saved enough for a deposit in a developing regional area with expanding infrastructure and a growing population. Areas like this can be a great investment and bring valuable equity as the house value has potential to increase at a consistent growth rate. After equity has grown, this asset will assist by strengthening future home loan applications and provide security for banks. In turn, this means you could afford a home in your dream suburb a lot sooner than it would have taken to save for the deposit.
Benefits of rentvesting include being able to enter the property market sooner, having the flexibility to live in a more enticing area, wealth and equity buildup, increase of cash flow, and possibly, cheaper rental payments than a mortgage. Other advantages include tax deductions like negative gearing and depreciation.
By depreciating investment properties, owners can reduce their taxable income resulting less tax to pay. Similarly, negative gearing is when the cost of owning an investment property outweighs the annual income it generates, resulting in a lowered taxable income.
Alongside the benefits, there are some possible downsides to this strategy. These include the instability of being a renter, ongoing rental payments, capital gains tax (CGT) incurred if you decide to sell, loss of government First Home Owner grants and higher interest rates that come with property investment home loans.
It’s important to highlight that rentvesting may not be an option for individuals seeking First Home Owner Grants. Homeowners must live in their newly purchased home within twelve months for a minimum of six consecutive months before it can be used as an investment property.
Best of both worlds
It’s possible to have a bit of both worlds with the option of renting out a room or area of a home. Live-in landlords are becoming more common as the need for single room rentals are increasing. This is attractive for students or individuals and may be more practical in cities or areas with local universities.
When renting out a room or area of the home you are entitled to claim a portion of living expenses including internet, water and electricity rates, council rates, interest on your mortgage, body corporate fees and property depreciation as tax deductions.
It’s always best to speak to a trusted accountant so they can assess your financial position. It’s also important to get a tax depreciation schedule prepared. BMT’s specialised quantity surveyors will ensure all depreciation claims are maximised. And don’t forget, the cost of the schedule is fully tax deductible.
For more information on how to claim depreciation on investment properties, contact BMT Tax Depreciation on 1300 728 726 or Request a Quote.