We are thrilled to introduce the first of of three...Read More
tHE pros & cons of Rentvesting
If you’re amongst the growing cohort considering purchasing an investment property, you might feel that property prices are the factor forcing your hand.
With the slowdown in wage growth and skyrocketing property prices in many parts of the country, the dream is starting to take a different shape for some buyers: rent-vesting.
According to the ASX Investor Study (2020), Australians aged 18-25 made up a quarter of those who began investing in the past two years – meaning we’re seeing investors younger than ever before.
These statistics tell us two things:
- Young people are more switched on when it comes to real estate than any previous generation.
- Our millennials are not averse to putting innovative property strategies ahead of the ‘great Australian dream’.
What is Rentvesting?
Definition: Rentvesting is an investment strategy for would-be homeowners who can’t afford their dream home yet.
This investment strategy allows you to still live in an area where buying a home might not be possible due to financial constraints, while at the same time holding a property in a location that suits your financial situation.
Essentially, it’s simply renting a property where you want to live (close to work, family – lifestyle choices like the beach) and buying an investment property in a location that gives you the best chance for capital growth at the same time.
The investment property essentially pays for itself between your rental and tax returns. And the investment property grows in value, all the while producing equity. If you’re a millennial and want to break into property investment in Australia, rent-vesting might be a viable option. By not buying now, you’re losing money by the day as property prices climb.
Why should you rentvest?
People who decide to go down the rentvesting route tend to be between 20-34 years old and at the stage where they’re looking to buy their first home.
- Don’t have equity in another property to leverage.
- Are struggling to save a deposit.
- Want to live in a metro location for career, lifestyle or family reasons but can’t afford the property prices in the area whether it’s due to a small deposit or low income.
NORMALLY a property has two forms of income: rental return & tax return.
But in this instance – say you decided to buy where you are currently posted. You might get your HPAS, FHOG, maybe even DHOAS approved and put towards the mortgage costs.
As another example, let’s assume that buying your dream home leads to mortgage repayments of $4,000 a month.
But if you rent a home in the same area, rental payments could be $2,200 a month, leaving you with $1,800 per month to invest.
Related: Is Your Money Working For You?
Take a look at this video where our Property Coach Robbie Turner breaks down a case study on how to buy your dream home:
PROS OF RENTVESTING
You can enter the property market sooner: Rentvesting allows you to break into the property market sooner as the property you purchase often requires a smaller deposit. This is as opposed to delaying your home-buying plans for several years because you have yet to save enough for a deposit.
You can live the lifestyle you want: If rental prices allow, you can live in your dream home now and not have to compromise on location or features, and you don’t have to worry about taking on the long-term commitment of a big mortgage and becoming stuck in the 30-year mortgage trap.
There are lots of compelling reasons here – budget considerations, where you are currently at in your life cycle, local amenity interests, safety and security, to name just a few.
You can take more time to save for your dream home: Owning an investment property allows you to save to buy your dream home but the number one advantage is that it’s forced savings – you’re already building equity with the investment property you have purchased.
Wealth building: Because your borrowing power is greater and/or you are saving on higher mortgage repayments your money could potentially work harder for you and your future by building up your retirement nest egg.
You will have more flexibility: when you’re renting, you can easily upgrade or downgrade to a different home if your circumstances change. Because you don’t have the high-cost burden of buying (or selling for that matter – up to 2.5% of the sale price), and due to housing flexibility and variety, the world is your oyster. You can ‘mix it up’ as renting can give you that flexibility and potentially a variety of accommodation types, whereas due to the very high stamp duty costs and other buying and selling costs, it’s not financially sensible to do this as an owner too often.
Think of the tax benefits: there are a host of tax benefits on your investment property/properties. Even interest payments on your investment property loan can be claimed as a tax deduction. You can claim depreciation on the building and any new fixtures and fittings.
Choose where to invest: Rentvesting allows you to be ruthless when it comes to choosing an investment, especially if you’re not ready to put down permanent roots in a particular area, rentvesting gives you the freedom to move around and choose the lifestyle that suits you best.
CONS OF RENTVESTING
You could miss out on FHOG: If you don’t have the right strategy, entering the property market as an investor rather than an owner-occupier, you could mean you will be missing out on the First Home Owners Grant (FHOG), which has strict eligibility criteria.
You are open to the risks of the rental market: Rent is higher in affluent suburbs and the trade-off for living in an area that you love is higher living costs including rent. It’s often like taking one step forward and two steps back until you’re eventually in a position to buy your own home. Plus, rising property markets often see the cost of rent parody mortgage repayments for comparable property types in comparable locations.
You don’t own your home: As much as you may love your rental property, you don’t own it. This can be especially difficult if you form an emotional connection to a house but then the landlord wants you to move out. Don’t forget that although a rental property might be vastly improved by a renovation project or simply a fresh coat of paint, remember that it’s not yours to tinker with.
Loss of full capital gains tax (CGT) exemption: your principal place of residence (PPOR) carries a ‘main residence exemption’ if you sell the property for a profit. Rental properties are generally subject to capital gains tax if sold for a profit. Renting is also much cheaper because you don’t have to pay capital gains tax (CGT), solicitors’ fees and other costs associated with selling a property.
IS RENTVESTING THE BEST OPTION FOR ME?
Depending on your personal and financial circumstances, there is a range of options available for you to choose from. As an ADF member, several benefits, entitlements, subsidies, and grants are available. These range from assistance on mortgage repayments to total lump-sum payments.
Here at Axon, we educate, coach and mentor you to invest in property and help you set yourself up for a lifetime of investment success.
Click below to watch our free video training webinar to get started today or take a closer look at DHA today!