Are you an aspiring Perth home owner having difficulty finding a decent place in your budget?
You are not alone. For many home seekers, the properties they desire are simply out of reach. This means they have to compromise on what they want, or keep waiting and saving in the hopes of one day being able to afford their dream home. But there is another alternative and it’s growing in popularity: rentvesting.
The word “rentvesting” is a blend of the words “renting” and “investing”. It refers to the practice of renting your home while buying an investment property elsewhere. This allows you to live in an area that you might be priced out of as a buyer, while still getting a foothold on the property ladder. Put simply, it’s renting where you want to live while buying where you can afford to purchase.
Who does rentvesting suit best?
Rentvesting is popular with people who want to live in metropolitan and inner-city areas but find the property prices there prohibitive. This includes young professionals, first home buyers, and people who are comfortable taking a slightly unorthodox approach to home ownership. As metropolitan property prices have risen, the practice is becoming more common. According to the ABC, around 340,000 Australians are rentvestors, which accounts for up to 15% of private tenant households.
While rentvesting appeals to those on a budget, it can also make sense for higher income earners looking to grow their wealth. Regional areas or outer suburbs might show higher growth than the areas in which they want to live, making those properties a more attractive investment.
What are the pros of rentvesting?
There are several lifestyle and financial benefits. On the lifestyle front, you get to live in the area that you desire even if you can’t afford to buy there. You also have the flexibility of being able to relocate easily, so if your family grows or you get a job in a different location, you can adapt your home to your changing needs.
On the financial side, you’re able to enter the property market sooner and start building equity or wealth. If the rental returns from your investment property exceed your expenses, then you have the benefit of additional income. If your expenses exceed your rental income, that’s called negative gearing, and you can claim the loss as a tax deduction. Other tax advantages include the ability to claim expenses such as real estate agent fees, property management fees, insurance and repairs.
How about the cons of rentvesting?
Again, there are some cons to consider. As a renter, your rent can go up, your landlord can end the lease, you can’t significantly alter the property, and you’ll probably need to relocate more often than if you were anchored to a home that you owned. And you’re also a landlord yourself, which means you have responsibilities like finding tenants and maintaining a property (that’s where an experienced property manager can help).
The main financial disadvantages include missing out on the First Home Buyer Grant and being subject to capital gains tax—that’s a tax on the profit when you sell a property, which owner-occupiers are exempt from. Also, the ideal of owning your home is still deeply ingrained in Australian culture, so you might get some pushback from friends and family who just don’t get it.
How do I know if rentvesting is right for me?
The first thing you need to do is crunch the numbers and see if rentvesting makes sense for your budget. You might want to talk to a mortgage broker or financial planner about the tax implications, and whether your home loan rates would be different if you’re an investor rather than an owner-occupier. You should also be clear about your investment goals: are you looking for a good rental yield to supplement your income, or is capital growth your main focus so that you can one day trade in your investment property for a future home?
Once you’ve set your priorities, you can start looking for the perfect investment property to meet your needs.