The latest buzz word around the property industry is rentvesting. A portmanteau of ‘renting’ and ‘investing’ which is becoming an increasingly common approach for new property buyers to enter the market.
It is pitched as a way to circumvent the issue of lifestyle vs property ownership, but is also a result of ever increasing property values pricing new buyers out of centrally located areas.
For the younger generation in particular, rentvesting has become an increasingly popular method to surpass issues of housing affordability. The trend has seen two distinctive types of new investors become more active in the property market.
The first are those who choose to continue living at home with Mum and Dad while purchasing a property they might like to live in later in the future. These investors choose to rent the property they own for now for a number of reasons, the main being that it is more cost effective and enables them to readily afford mortgage repayments due to the constant income that rent provides them with.
The second category of rentvestors are those who don’t necessarily have the luxury or the option to live at home with their parents. These are investors who rent in less affordable locations where they would like to live whilst purchasing a property in suburbs that are more affordable to enter the market.
Where do you look to rentvest?
Essentially, rentvesting involves buying a property in an emerging area while renting in an already established one. This enables people to enjoy things such as the café culture and night life that the CBDs of cities are known for, without paying the cost of a mortgage to live there.
Typically, the cost of a mortgage payment each week in these areas is far higher than it would be to rent, while in other areas, the rental cost and mortgage cost are roughly the same. For example, a nice apartment just a few minutes from the CBD by public transport may cost around $400 per week to rent, however it would be perhaps $800 per week as a mortgage payment.
Rentvesters generally purchase a lowered priced property in an area with a strong prospect for growth and consistent rent prices. The rent they receive will pay their mortgage, while they rent a house in an area they want to live in, just as anyone else would.
For this reason, rentvesting appears to make sound financial sense. But there are advantages and disadvantages when you consider the other aspects of buying and renting?
The advantages of rentvesting
The main pro of rentvesting is the freedom it provides. It enables you to live the lifestyle you desire, while still working towards property ownership. Buying and occupying limits you to a house in a neighbourhood you can afford right away, but an investment property in an emerging area can provide a way to pay the mortgage and build your future financial security.
Renting in the city gives you the flexibility to move to a smaller or larger home as needed, with relatively little hassle, aside from breaking a lease and the moving itself. The lack of permanency usually presented as a negative for renters, becomes a positive for rentvesters.
Additionally, a great place to live may not be a great place to invest. As stated above, the potential rental income from some locations will exceed others. However, the rental yields don’t go up with the price of the property and the owner’s mortgage needs. Instead, they are dependent on the socio-economic factors of the neighbourhood itself.
A greater indicator of the rental income possible is the access to the amenities such as transport, public works like parks and the proximity to the main business district, universities and shopping precincts as well as the overall desirability of the area as a fashionable place to live. Generally, this makes it more affordable to rent a house in these areas than attempt to buy a property, as the rent rate will hit a ceiling that is much lower than the weekly mortgage payments.
One of the main advantages of rentvesting is the tax breaks. An investment property makes you eligible for a huge number of deductions, but it you make it your home, you are not entitled to claim any of them. According to the Australian Taxation Office, the expenses you can claim on include:
- Water and council rates
- Home insurance
- Tenant advertising
- Agent fees and commission
- Pest control, cleaning and gardening bills
- Repairs and maintenance
- Depreciation deductions for the wear and tear that occurs to the structure of the building and the plant and equipment assets contained
- Land taxes
- Interest on mortgage repayments
The disadvantages of rentvesting
Rentvesters are still subject to all the same issues that standard renters face. It always feels like a temporary solution, which makes it harder to feel connected to a home and settled. You will have to deal with landlords and Property Managers when necessary repairs are required and you have no power to personalise the property beyond your furniture and perhaps a few pictures on the walls.
The changing Australian property dream
Renting while owning a property requires the ability to understand the big picture. The aim of future stability pales in significance with the immediate emotion surrounding home ownership. Generations of Australians have dreamed of buying a house and owning a block of land. Purchasing then giving it up to rent and pay someone else’s mortgage can seem counter intuitive and can diminish your happiness at entering the ranks of property owners.
What you should consider to make rentvesting work for you
Research the areas where you want to invest and rent. Find locations with lower purchase prices but consistent rent rates. In general, properties tend to double in value every ten to twelve years, so take the time to discover and consider the areas that may increase in value. A Real Estate Agent is a valuable source of information and can help you find properties that meet your criteria.
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 to make sure you have everything covered and act as an objective outsider to help you make sensible decisions.