Rentvesting: a smart strategy for first home buyers
Rentvesting has become a popular property investment strategy, especially among younger Australians who are eager to enter the real estate market but face the challenge of high property prices in their desired living locations. By renting where you want to live and investing where you can afford, rentvesting allows you to grow your wealth while maintaining your lifestyle. In this ultimate guide, we’ll explore what rentvesting is, why it’s gaining traction, and how you can make it work for your financial future.
What is rentvesting?
Rentvesting is a real estate investment strategy where you rent a property to live in while simultaneously investing in a property located in a more affordable area. This allows you to maintain your lifestyle in a high-cost area while building wealth through property investment in a lower-cost market. Essentially, you become both a tenant and a landlord.
For example, you might want to live in a trendy suburb close to work or city amenities, but the property prices are out of your reach. Instead of buying there, you rent in that suburb and buy an investment property in a more affordable area that has strong growth potential.
Why rentvesting is gaining popularity
Rentvesting has grown in popularity due to skyrocketing property prices in major cities like Perth and Brisbane. Many first-time buyers find it difficult to save enough for a deposit on properties in prime locations. Rentvesting offers a solution by allowing people to:
- Enter the property market sooner.
- Live in desirable locations without compromising lifestyle.
- Build wealth through real estate investments.
In the past, property ownership was linked to living in your own home. However, with rentvesting, the focus shifts to wealth-building and financial independence through property ownership, even if it’s not where you live.
The pros and cons of rentvesting
Before diving into rentvesting, it's essential to weigh the advantages and potential drawbacks. Let’s break it down:
Pros
- Affordability: You can buy a property in a more affordable location while renting in an area you love, which may have higher purchase prices.
- Entering the market sooner: Rentvesting allows you to enter the property market faster, capitalising on potential property appreciation instead of waiting to save for a home in an expensive suburb.
- Lifestyle flexibility: Renting gives you flexibility. You can live close to work, in vibrant communities, or near amenities without committing to a large mortgage.
- Tax benefits: As an investor, you may benefit from tax deductions on interest, property management fees, repairs, and depreciation, especially if you negatively gear your investment.
- Building wealth: By owning an investment property, you start generating rental income and benefiting from potential capital growth, helping you build wealth over time.
- Hedge against rising prices: Investing now allows you to hedge against future property price increases. Even if property prices continue to rise, you’ve locked in a property that could appreciate.
Cons
- Renting costs: You’ll still need to pay rent in the area you want to live in, which might feel like a financial burden while paying off a mortgage on your investment property.
- Property management challenges: Managing an investment property can involve additional costs, such as property management fees, repairs, and dealing with tenants.
- Risk of vacancy: There’s always a chance your investment property could be vacant for some time, affecting your rental income and overall cash flow.
Steps to rentvesting success
If you’re ready to dive into rentvesting, here’s a step-by-step guide to help you get started:
1. Research locations for investment
Choosing the right location for your investment property is crucial. Look for areas with:
- Affordable property prices compared to your desired rental location.
- Strong rental demand, ensuring that you can find tenants quickly.
- Potential for capital growth, considering future infrastructure developments, job opportunities, and population growth.
- Low vacancy rates, to ensure that your property will be consistently rented out.
Some rentvestors choose regional areas or outer suburbs with higher yields and growth potential, rather than inner-city properties.
2. Factor in tax benefits
One of the key advantages of rentvesting is the potential tax benefits:
- Negative gearing: If your rental income is less than your expenses, you can claim the loss as a tax deduction, reducing your overall tax liability.
- Depreciation: You can claim depreciation on the building structure, as well as fixtures and fittings, which can significantly reduce your taxable income.
- Other deductions: You may also be able to deduct expenses such as property management fees, maintenance costs, and loan interest.
Make sure you speak with an accountant or tax advisor to understand how rentvesting can impact your tax position.
3. Plan for the long term
Rentvesting isn’t just a short-term strategy. It’s essential to plan for the long term by:
- Reinvesting rental income: Use surplus rental income to pay down your mortgage or invest in more properties.
- Considering future goals: Over time, your financial situation and lifestyle needs may change. Consider how rentvesting fits into your broader goals (e.g., buying your dream home, retiring, or expanding your property portfolio).
- Reviewing your strategy regularly: Keep an eye on market conditions and review your investment strategy annually to ensure it aligns with your financial objectives.
4. Managing rent and investment costs
Effective cash flow management is vital. Ensure you have a solid financial buffer to cover unexpected expenses (e.g., property repairs, rental vacancies) and that you aren’t over-leveraging.
5. Monitor market conditions
Regularly review both your rental location and investment property market conditions. Stay informed about economic factors like interest rates, market trends, and government policies that could affect your investment’s profitability.
Rentvesting provides a strategic path for aspiring property owners who want the best of both worlds—living in a desirable location while investing in affordable real estate. It’s an innovative solution that can help you get ahead in the property market without sacrificing your lifestyle. By following the steps in this guide, you can make smart, informed decisions about rentvesting and set yourself up for long-term financial success.
If you’re ready to take the plunge, consider speaking with a mortgage broker or financial advisor to help you navigate the complexities of rentvesting and achieve your property investment goals.
