Everyone understands that property investment is one of the best, and most stable investments in Australia. Track record shows, Melbourne properties grows by an average of 7% annually.
Rent or buy? Should you consider Rentvesting?
Owning a home is a big part of the great Australian dream. However, with the ever-increasing real estate prices, it has become very difficult for many young Australians to get into the property market, let alone being able to buy in an area where they want to live.
As a way of both owning a property and living in their desired location, property buyers are increasingly adopting a practice known as ‘rentvesting’.
What is Rentvesting?
Rentvesting is the practice of living in a rental property while owning a separate investment property and renting that out. Rentvestors typically rent a property in a location where they want to live in and buy another property where they can afford, and then renting that out as an investment property.
For example, while your dream home might be a three-bedroom house in the city, you may not be able to afford it as the prices are usually too high. But because you want to get the benefit of rising property prices, you might want to buy a property in a town further away from the city, where prices are more affordable. You are essentially enjoying the benefits of having an "affordable property" while living where you want to.
But is rentvesting a good idea? Here are some key points to think about.
Rentvesting Pros and Cons
Just like any investments, Rentvesting has its pros and cons. Here are some major benefits and things you need to consider before jumping into Rentvesting.
Benefits of Rentvesting
1. What you can afford does not determine where you have to stay in
You can finally buy a house you can afford and stay in a place where you like. The best of both worlds? It usually is. But watch for the cons.
2. Enjoy the benefits of Property Growth sooner
Remember, property prices has been growing at rate of 7% annually. IE, in a year's time, you will have to pay an average of 7% more for the same house. Ask yourself: When did you last get an annual salary increment of at least 7%? With average salary increments of around 3%, it does suggest that if you're not going to get your foot into the property market now, you will never have the chance to.
Note though, in a hot property market, such as now, (2021) property prices have been rising between 1 to 2 % every month. The property you bought will be worth between 10-15% more in a year's time. Or the property you had not bought, will cost you 10-15% more next year.
3. Tax Benefits of owning a Rental property
As a landlord, all expenses related to the rental property are tax deductible. With the right investment structure, you will be able to claim all, if not most of these expenses, such as property management, maintenance, travel, depreciation. This is just a generic advice, and does not take into consideration your personal circumstances. Always discuss with your accountant, to understand the best structure applicable to you, and what expenses you can or cannot claim.
Disadvantages of Rentvesting
1. You are still living in a rental property
While you might have already owned a property, you are still staying in someone else's property at the end of the day.
As a renter, you can be forced to vacate the property at the end of your lease if the owner wants to re-occupy or sell the property. They can also increase your rent, subject to prevailing rental laws. You will also need to put up with regular property inspections in the home, which you would not have to do if you live in your own home.
Just as you do not want your tenant to modify your investment property, you will also not be allowed to modify your rented home. Good or bad, it is what it is. You will have to live with what you have.
2. The home might not grow in value
While property values are rising at an average of 7% annually, remember, this is an average figure. Blue-chip, sought-after areas tend to rise faster than others. What this means is, there will be areas where property prices do NOT rise. There is also a possibility of your property losing value. Good luck if you have bought in one of those areas. Always do your due diligence. If you are unsure, our independent property buyers advocacy service will be able to search and buy the right properties in the right areas.
3. You have to pay both rent and homeownership costs
Rentvesting can be expensive. Especially so, if you have bought in the wrong area, or if you have believed the hype of negative-gearing, without understanding that that is. If you are not sure what negative-gearing is, read our guide to negative-gearing.
So, once again, buying the right rental property is critical to you being a successful RentVestor. Other expenses you will need to consider include, purchase costs, conveyancing, loan interest repayments, property repair and maintenance costs, property management fees, council and water rates, etc.
4. You might lose access to First Home Owners incentives.
Depending on the prevailing First Home Owners Grant (FHOG) and other First Home Owners incentives in your state, you might no longer be eligible for some or all of them, because you were previously a property owner. Having said that, considering a decent property costs between $800k to $1million, the typical FHOG grant of between $10000-$20000 isn't really a lot. Most auction biddings happen in increments of $10000-$20000 increments, just for comparison sake.
Is Rentvesting Good or Bad?
Rentvesting can be a good strategy to help you build your future wealth through property ownership while maintaining a certain quality of life. Our advice as property buyers advocates are: the success of this strategy is always reliant upon you buying the right type of property. Always have a good understanding of the strategy you are using. Always analyse each property and do your due diligence. No two properties are the same, even if they are right next to each other. The strategy your buddy has used might not be the right strategy. This monkey-see-monkey-do strategy is dangerous. We know many who have gotten into trouble "simply by copying their friend". Read this caution.
Bear in mind, just like any investment strategy, this method property investment is not for everyone. Make sure you understand how investing in real estate works and determine if rentvesting could work for you, based on your own time frames and financial objectives. As always, get in touch with our property consultants if you want more information. Our buyer's agents will be able to go through your situation, budget with you and advice which strategies are right for you.