You might have heard the term ‘rentvesting’ recently - that’s because it’s becoming increasingly popular with Australians looking for alternative ways to enter the property market! So, what exactly is rentvesting? Put simply, it’s when a buyer will rent a property where they want to live and buy an investment property in a suburb they can afford. Live where you want to and buy where you can afford to! Sounds great, right? In this C&G blog, we’ll discuss everything you need to know about rentvesting before deciding if it’s the right option for you.
Like many alternative financing methods, rentvesting sounds great on paper. Prospective buyers won’t need to adjust their lifestyle by moving to an area they don’t want to settle in but can still receive all of the benefits of investing in property. Lifestyle is definitely one of the most popular reasons that people decide to make a ‘rentvestment.’ You might want to live in a certain area for access to particular schools, to stay close to family and friends, the familiarity and safety of a particular neighborhood, or simply for proximity to bars, cafes, restaurants, shops and the beach (hello, Bayside!)
Rentvesting is particularly popular with people looking for a hassle-free (or, less hassle-filled) living arrangement. When you’re a renter, you’re not responsible for any issues that might arise related to maintenance. You’re also not locked into a long-term lease, so if you’re new to Melbourne and want to explore as many areas as possible, you can!
Wealth building and tax
Rentvesting makes it much easier to save on your mortgage repayments, depending on where you buy. Some investors will even buy multiple properties and build their wealth that way. Rentvesters can also claim holding and depreciation costs on their tax return, and might even be able to claim stamp duty, conveyancing, and lending fees (be sure to discuss this with your tax accountant first!
Loss of capital gains tax exemptions
You’ll definitely want to speak to your accountant about this one. If you live in your investment home, you don’t need to pay the capital gains tax - but if you ARE making a profit from the investment property (also known as positive gearing) you’ll lose your exemption status, which could run the risk of moving you right back into the red.
Less control over your home
One of the biggest reasons Australians want to buy property is so that they can make their house their own. If you decide to explore the rentvesting route, you won’t have this same freedom to renovate, design, and truly feel at home in your house. This can be especially hard for people who have lived in their own property and then transitioned to a rental property. While this is hardly a make-or-break scenario, particularly for those looking primarily to make a profit, the lack of control can have a profound effect on your well-being.
Spending money on rent
A lot of people believe that renting is simply “paying off someone else’s mortgage.” While this isn’t necessarily the case, it’s worth considering how much you will be spending on rent (particularly if you choose to live in a more expensive and affluent area) and if it is a big enough amount that your lower mortgage payment/s will actually return a profit, or if it will end up working out the same as if you bought a home in the area you want to live, or in a nearby area for a lower amount.
Rentvesting is a relatively new phenomenon, meaning that investors and finance experts are still learning about its overall value. Rentvesting is generally a better option for people on high salaries with strong borrowing power. Alternatively, if you’re looking to enter the market for the first time and want to rentvest, make sure that there is a significant enough difference between what it costs to buy compared to renting in the same area.
It’s always best to seek independent financial advice before making any decisions! C&G can help guide you in the right direction. Contact us today for a friendly chat.