In recent years, a new property investment strategy has been gaining traction among Australians looking to break into the housing market – rentvesting.

Imagine renting a trendy apartment in the heart of Sydney and buying a 2-bedroom unit in up-and-coming Parramatta.

Rentvesting offers a unique opportunity for property investors constrained by high prices who want to get onto the property market by enabling them to buy an investment property instead. Rentvesting helps young professionals and first-time homebuyers buy an investment property.

Is rentvesting a good idea for achieving financial goals in the real estate market?

Of course, rentvesting has its drawbacks. In this article, we’ll discuss what rentvesting is and delve into its advantages and disadvantages to help you decide whether it’s suitable for you.

What is Rentvesting?

Rentvesting is a strategy that allows you to live in your preferred neighbourhood while investing in property in more affordable areas simultaneously.

It is achieved by renting in high-cost urban areas, where buying a property may be financially challenging for you to achieve, and investing in more affordable rural or regional areas with lower property prices.

Rentvesting differs from traditional property ownership, where individuals typically buy a home to live in, i.e. owner-occupied.

The rentvesting strategy leverages rental income to cover expenses and potential wealth creation. Investing in affordable regions can lead to satisfactory rental yields received in hand with lower entry costs, allowing you to build a property portfolio over time.

Why Rentvest?

Rentvesting offers a range of advantages that make it an attractive option for many Australians. From flexibility and affordability to investment diversification and potential tax benefits, rentvesting provides a unique approach to property ownership that can help you achieve your financial goals.

Flexibility

One of the primary advantages of rentvesting is the flexibility it provides. By renting the property you live in, you are not tied down to a specific location or property. This allows you to live in your desired area, whether it’s a trendy inner-city suburb or a beachside town, at an affordable rent without the financial commitment of buying a home there.

If your lifestyle or job requires you to move frequently, rentvesting enables you to do so without the hassle and costs associated with selling a property.

Affordability

Rentvesting provides a more accessible entry point into the property market by allowing you to invest in areas where property prices are more affordable. This means you can get your foot on the property ladder sooner, even if you can’t afford to buy in your preferred location.

Another key benefit of rentvesting is the possibility of not having to pay lenders mortgage insurance (LMI) when taking out an investment property loan. LMI is typically required by lenders when borrowers have a deposit of less than 20% of the property’s value.

By rentvesting and investing in more affordable areas, you can avoid the extra cost of LMI, making the overall investment more financially viable and reducing the upfront costs associated with buying an investment property.

Investment Diversification

Rentvesting also offers the opportunity to diversify your investment portfolio. By owning an investment property separate from your primary residence, you can spread your risk across different markets and property types. This diversification can help protect your investments from the volatility of a single market or property type.

Additionally, investing in a different area can provide exposure to different economic and demographic factors, potentially leading to higher returns.

Tax Benefits

Rentvesting comes with several tax advantages that can help boost your investment returns. As an investment property owner, you can claim tax deductions for expenses related to your property investment, such as mortgage interest, property management fees, and maintenance costs. A tax deduction can help offset your taxable income and reduce your annual tax bill.

Furthermore, if you decide to sell your primary residence in the future, you may be eligible for capital gains tax (CGT) exemptions, which can provide significant savings.

Potential for Capital Growth

By investing in a property in a more affordable area, you can potentially benefit from higher capital growth over time. As the area develops and becomes more desirable; property prices may rise; and your investment property could increase in value.

This capital growth can be realised when you eventually sell the property or use it as collateral for your next investment property.

Rental Income

Owning a rental property also provides you with rental income. This income can help cover mortgage repayments and expenses associated with the property, making it more financially viable.

Additionally, if the rental income exceeds the expenses, you can use the surplus to pay down the mortgage faster or reinvest in other properties.

Emotional Benefits

While rentvesting may not provide the emotional satisfaction of owning your primary residence, it can still offer a sense of pride and accomplishment.

By investing in property, you are taking an important step towards building wealth and securing your financial future. This can be particularly rewarding for those who have struggled to enter the property market sooner due to affordability constraints.

Cons of Rentvesting

While rentvesting offers several advantages, it’s important to consider the potential drawbacks as well:

Ongoing Rental Costs

As a tenant, you will be responsible for paying rent indefinitely, which can be a significant ongoing expense. This means that the money you spend on rent is not contributing to building equity in a property you own.

Limited Control Over Rental Properties

When you rent a property, you have limited control over it. You may be unable to make changes or renovations without the landlord’s approval, and you may be subject to rental inspections and potential rent increases.

Missing Out on Government Grants and Incentives

Rentvestors may not be eligible for government incentives available to owner-occupiers and first-home buyers, such as the First Home Super Saver Scheme (FHSSS) and stamp duty exemptions. This can result in a loss of financial benefits that property investors do not receive.

Need for Careful Financial Planning

Rentvesting requires careful financial planning to ensure that the rental property is generating sufficient rental income to cover the mortgage and expenses. If the rental yield is not sufficient, you may need to cover the shortfall out of your own pocket.

Capital Gains Tax Liability

Property owners will have to pay capital gains tax (CGT) on any profit they make in selling a rental property. Although, the 50% CGT discount is available if the property is held for over 12 months.

Fees and Costs of Owning a Home

Owning a property involves various expenses like CGT, solicitors’ fees, and real estate fees, which are not applicable when renting. These ongoing home ownership costs can add up and impact the overall financial implications of a rentvesting strategy.

Weighing the Pros and Cons

When considering whether rentvesting is right for you, it’s important to carefully weigh the pros and cons based on your individual circumstances and financial goals.

Factors to consider include your lifestyle preferences, financial situation, and long-term goals for building wealth and owning a home.

Is Rentvesting a Good Idea or Not?

Rentvesting presents both advantages and disadvantages. If it meets financial needs, lifestyle preferences, and long-term goals, rentvesting can lead to home ownership and wealth building. However, it requires careful planning and consideration of property ownership costs and responsibilities.

Reviewing the Positive Side

Rentvesting allows individuals to live in financially challenging locations without being tied to a specific property, offering flexibility in mobility.

It can contribute to long-term wealth accumulation through rental income and appreciation in value, allowing quicker entry into the property market. Attractive tax benefits like negative gearing and depreciation costs further enhance the financial appeal of rentvesting.

Reviewing the Drawbacks

Rentvesters must balance mortgage payments on their investment property with rental payments, which can strain finances. Balancing mortgage payments and rental payments requires confidence and expertise.

If the investment property decreases in value or fails to appreciate, it may be priced out of the desired area for future home purchases.

Alternatively, selling the property for profit will incur additional tax via CGT.

The Verdict

Overall, rentvesting can be a smart strategy if it aligns with your financial situation, lifestyle preferences, and long-term goals. It provides a path to home ownership and wealth building while maintaining flexibility.

However, it requires careful planning and consideration of the costs and responsibilities involved. Consulting with a property adviser or financial adviser is recommended to determine if rentvesting is the right approach for your specific circumstances.

Ready to Build an Investment Portfolio with Rentvesting?

While rentvesting can seem complicated and time-consuming, it doesn’t have to be, with knowledge and expert guidance.

Need investment advice? Central Coast Financial Planning Group can work with you to tailor your investment plan and build your portfolio. Our financial advice team can help you establish direction for your investments to achieve your financial and lifestyle goals.

Call us or book online to secure your consultation today!

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