Rentvesting is a clever way to get your feet on the first rung of the property ladder.
It has become more popular in recent years thanks to rising property prices and issues with housing affordability. This was shown in the latest statistics from the Australian Bureau of Statistics (ABS) on Housing Occupancy and Costs for the 2015/2016 financial year published in October 2017.
According to the ABS, more than 1.78 million Australian households owned a residential property other than the one they currently reside in. Of these households, 342,000 owned a residential property but were renting their usual residence.
Given rentvesting’s rising popularity and ability to help both home buyers and investors to enter the property market, let’s look at what this method involves as well as some of the pros and cons to be aware of.
What is rentvesting?
Breaking into the property market can be difficult and rentvesting allows you to buy an investment property in an area you can afford while renting a property in a location that suits your lifestyle.
Rentvesting can help you get into the property market sooner, particularly if buying a first home in the area you live is currently out of reach. By buying an investment property, rather than a home, you can build a property portfolio which can later be used as leverage to help afford a home, or even additional investment properties down the track.
Let’s say you want to buy a four-bedroom home in a popular Melbourne suburb, but the sale prices in the area mean these homes are out of your reach. The rentvesting solution to this problem would be to rent the ideal four-bedroom home in your desired suburb where you want to live and then buy an investment property in a suburb where house values are more affordable.
Renting the investment property to tenants will help you to pay off the loan rather than having to use part of your income or savings to meet regular loan repayments. Over time, the property may increase in value, building the equity you need to meet any loan requirements necessary to purchase a home or expand your portfolio down the track.
Pros of rentvesting
There are a number of pros for those who decide to employ rentvesting as part of their investment strategy.
Apart from the obvious financial freedom this method provides, one key benefit is the ability to live in an area that suits your current circumstances.
Location is key and often rentvestors will rent in a location that is close to where they work or study, or in an area that is within reach of features that are important to their desired lifestyle such as beaches, parks and restaurants.
Given rentvestors are generally of the younger generation, they often aren’t ready to purchase a home in an area where they may not plan to stay for the long term. The flexibility to complete study, travel or move from place-to-place while still purchasing a property as an investment is a drawcard for those thinking about whether to rentvest.
Similarly, rentvesting provides an opportunity to live in the property that you want to live in, now. If a property in a desired location is unaffordable, why not rent and achieve the living conditions you want now rather than compromise? Owning an investment property also provides you with a range of tax benefits. In addition to earning a rental income you can claim expenses involved in holding the property such as interest on your loan, property management fees, repairs, insurance, maintenance and property depreciation.
These tax deductions are only available if a property is income producing and cannot be claimed on a home. This additional cash flow also helps to make owning a property more affordable.
Cons of rentvesting
While rentvesting might sound appealing, not all aspects of this strategy are positive.
Firstly, when you rent a property there is no guarantee that you can stay there for the long term. A landlord may decide to sell the property or move into it themselves, forcing you to find another home. While notice is required, there may not be enough time to find another property that meets all your desired needs and matches up to your expectations.
You also can’t personalise the property. In a rental property you are limited to the amendments and updates the landlord is willing to take out. You can’t renovate to add new features and often even require permission if you wish to hang pictures in any permanent fashion. You have to be willing to compromise and live with what you have.
Finally, owning an investment property is not without its risks and you should seek both financial and tax advice. Property markets fluctuate, and you may not achieve the capital gain to produce the equity needed to buy another property in the short term. It’s important to stay in tune with what is happening with prices in the area.
Choosing the best rental property to live in while you rentvest
Every individual will have a different idea of what they need in order to feel comfortable in their home.
Start by making a list of things you desire as well as the things you can’t live without. Do you need a certain number of bedrooms? Is it essential for there to be two bathrooms or a two car garage?
Picking a suburb location which has these main features is the next step. Decide where you need to live in relation to work and set a budget of how much you want to spend in rent to help narrow your search.
Wherever you choose, check access to transportation hubs and nearby facilities and even do a search to gauge whether vacancy rates for the area are high. This can be handy to know in case you have to move if your landlord decides to make any changes after your tenancy agreement ends.
Finding the right investment property in which to rentvest
The key is to do your research. Find locations with lower purchase prices and consistent or increasing rental values.
Be strict about the property being an investment and remove the emotional attachment of buying a home. Think of it as a means to an end, rather than the end itself and enlist the right help and research tools to make sure you have everything covered and act as an objective outsider to help you make sensible decisions.
PropCalc is a powerful research tool which uses information specific to each property to provide you with the real cost of owning an investment property. The tool provides you with key suburb data and features the ability to include changes in interest rates, maintenance costs, council rates, insurance and much more.
Seek expert advice for your rentvestment
Before you rentvest, seek advice from a range of experts.
A financial planner can provide you with the necessary advice and help you with planning to ensure you reach your long-term goals when it comes to buying an investment property, expanding your portfolio or even affording a house down the track.
It’s also essential to speak with an Accountant as in addition to the deductions you can claim, there are other tax implications, such as capital gains tax, to be aware of when purchasing an investment property.
Finally, speak with a specialist quantity surveyor to organise a comprehensive depreciation schedule for your investment property. This will help you to ensure you claim the maximum deductions available for the wear and tear of both the building structure and any eligible plant and equipment assets found within the property.