What is rentvesting?
Rentvesting is an investment strategy that allows you to live in an area that suits your lifestyle whilst owning property in an area that suits your budget.
This is achieved by buying an investment property and leasing it out to a tenant while you rent your own home elsewhere. Alongside potential capital gains from the property, the rent you receive from your investment property should in turn offset the rental costs of your place of residence.
Rentvesting has become a popular strategy for first home buyers as property prices, particularly in our capital cities, have become increasingly unaffordable.
With the average cost of mortgage repayments typically higher than rent, rentvesting can allow you to live in an area for cheaper than if you were to buy.
This strategy can also give you more flexibility when investing in a quality asset that will achieve strong capital growth. This is because you are not limited to only investing in the areas where you yourself would want to live in.
Rentvesting case study
To explain this further, we’ll use an example.
Sarah is a 28-year-old teacher who rents an apartment with a friend in Fitzroy, a nice inner-city suburb in Melbourne. She is within walking distance from the high school where she works and has most of her family and friends living nearby.
Sarah wants to invest in property but with her savings and on a single income, the most she can afford is a property worth $500k. After some research, she finds that the only Fitzroy properties within her price range are small two-bedroom units in large apartment blocks.
Not wanting to move out of Fitzroy but concerned about the long-term capital growth of these units, Sarah is now faced with a dilemma: she can either resist buying property until she builds a bigger deposit or compromise on the quality of her
Sarah instead decides on the third alternative which is to rentvest and starts looking for a better quality asset in a more affordable area. She is soon able to find a nice three-bedroom house in a growing outer suburb that is selling within her $500k budget.
After some further research on the property, Sarah determines she can charge around $1,600 in rent each month, directly offsetting the $1500 she currently pays for her shared apartment in Fitzroy.
By rentvesting, Sarah is able to break into the property market, attain a good quality asset and continue living her preferred lifestyle in Melbourne’s inner suburbs.
What are the pros of rentvesting?
You get to live where you want
The beauty of rentvesting is that it allows you to live in an area that you might otherwise have been priced out of. Whether you want to be close to the city, work, friends, family or just a great community, you’ll have greater freedom in your lifestyle choices whilst still breaking into the property market.
Build wealth through property
For investors looking to grow wealth through a property portfolio, rentvesting will give you greater control over your investments and will help kickstart your property journey sooner.
Buying an investment property with the intention to rent can also boost your borrowing power when compared to an owner-occupier, meaning you might be able to take out a bigger loan.
Lastly, receiving rental income can help you build equity in the home fast, allowing you to finance your next investment property sooner.
As you will likely be receiving rental income from your investment property, there are certain rentvesting tax benefits and deductions you may be able to claim. These can include property maintenance, fees, the interest charged for loans and even depreciation on the building.
Rentvesting provides far more flexibility to an investor when compared to the traditional owner-occupier. This is because it allows you to buy good quality assets in areas you can afford, not just where you want to live.
The strategy will also give you more flexibility with your own living arrangements. Renting means that you are not tied down to a particular property or location, allowing you to upsize, downsize or relocate as your circumstances dictate.
What are the cons of rentvesting?
Loss of CGT exemption
If you later sell your investment property for a higher price, you will be required to pay Capital Gains Tax on the profit made by the sale.
A 50% CGT discount currently applies for investment properties held for over one year, however, owner-occupiers are not subject to Capital Gains Tax at all.
You can’t underestimate the satisfaction of living in a home that you own yourself. This is the ‘Great Australian Dream’ and is a big factor when it comes to building a connection with your home.
From interior design to the garden, owning your own home gives you complete control over making the property your own.
As a tenant, you’re at the mercy of your landlord and their plans for your property. This means that you won’t have control over the price of rent, renovations, inspections and even the length of your tenancy.
This can cause a great deal of inconvenience for you and your family, especially if it means having to relocate your home and your life at the behest of your landlord.
Being a landlord on your investment property also comes with its own risks and costs.
Ongoing property maintenance is your responsibility and will ultimately be coming out of your wallet. Particularly if you’ve bought an older asset, these maintenance costs can grow substantial and eat into your cash flow and savings.
Ultimately, whether rentvesting is right for you will depend on your individual needs and circumstances. For additional help and advice on your own property journey, please get in touch with one of our finance team.