An even worse scenario can take place where these households set a static deposit amount to save up for, only for it to move higher and higher as house prices appreciate – forever chasing the moving target until they are stuck renting instead of owning.
This is where ‘rentvesting’ as a homeownership strategy comes into play.
‘Rentvesting’ is when the household purchases a quality investment property that fits their budget, typically further away from capital cities, while continuing to live in a rental property in a location that fits their lifestyle.
Especially common amongst young Australians, the strategy helps them receive rental income from their investment and ride the wave of potential gains rewarded to property investors. All without sacrificing their current way of life. In this article, we look at some of the pros and cons of rentvesting as a strategy to get started in the property market.
Pros:
1. Freedom and flexibility to choose where to live
Owning a property in the CBD may be out of reach, but renting is more affordable. The strategy gives more freedom and flexibility because they are not constrained by a purchase budget or tied to a particular location.
2. Lower-cost access to a relatively stable, tangible asset
Time and cost to a household’s first investment can be significantly reduced as they opt for a cheaper real estate option. Some experts argue that time in the market is as important as location. Entering the property market early can increase an investor’s chances of extracting as much value from the investment as possible.
3. Potential capital growth
It may seem counterintuitive to purchase a property just to immediately rent it out. But depending on the investor’s goals, capital growth is most likely a sought-after reward. If the circumstances are right, investors may choose to sell the property for a profit in the future, then use the proceeds to buy their dream home in their dream location, potentially faster than if they left their money in a savings account.
4. Rental income can pay for your rent
With proper planning, rental income from your investment property can potentially pay the partial, or the full rental amount of where you decide to live. Keep in mind however that the investor still has the mortgage to manage.
5. Potential tax benefits
There are a host of tax benefits available to property investors. Depreciation can be claimed on the structure along with the new fixtures and fittings. Similarly, even interest payments on the loan can be claimed. It is best to speak to a professional to make the most out of your investment.
Cons:
1. Subject to changes in tenancy
It is no secret that renting instead of owning has many drawbacks. On top of paying the weekly rent on time, households need to worry about increases in rent, renewal of their lease, or any changes in tenancy.
2. Mortgage stress to higher investor interest rates
Interest rates attached to investment loans tend to be unfavourable compared to interest rates granted to owner-occupiers. With an investment security, borrowers are subject to higher repayments and higher total interest paid over the life of the loan, which could contribute to mortgage stress.
3. Capital gains tax liability on the investment if sold
Property used as the primary place of residence is exempt from capital gains tax (CGT) when sold. However, as an investment, it is subject to CGT on any profit made from the sale of the property.
4. Potential capital loss
All things considered, paying CGT isn’t so bad because it means a profit was made. As a worst case scenario, the investment property can depreciate in value if market conditions are unsuitable for growth.
5. No access to the First Home Owners Grant
There may be government incentives in place to help households get into their first home – like the First Home Owners Grant that the rentvester will not be able to take advantage of.
Rentvesting fits a particular strategy of getting Australians into the property market earlier. But remember, it may not be suitable for everyone. We recommend speaking to a finance professional who understands your overall situation and goals.
Any advice provided is general in nature and should be considered in line with your financial situation, needs and objectives.
