How to escape renting and buy your first property by ‘rentvesting’
Australians are vigorously encouraged to enter the property market, but not everyone has the capacity to relocate to an affordable area. Chances are if you’re currently renting, you made choices about your location out of sheer necessity or lifestyle considerations rather than financial considerations. The benefit of renting is that you can enjoy the affordability of a lifestyle that may have been less accessible if you wanted to buy in the same area. This is where rentvesting comes in.
Rentvesting has become a mainstream strategy, allowing first home buyers to get into the property market or expand their portfolio and still enjoy the lifestyle they want in the location they choose. Rentvesting is a strange concept for traditionalists who followed the well-worn path of buying a property and then living in it. By renting in the area you love and buying in the suburb you can afford, today’s homeowners have cracked the code for how to get the best of both worlds.
A Young People’s Game?
Rentvesting became popular over the last few years, as inner-city housing prices crept ever slowly upwards. Millennials (those born in the early – mid 1980s) got onto this early by continuing to live at home after completing school, starting their professional career and saving the majority of their wage as mum and dad kept them fed and sheltered. Many of them could then purchase an investment property in their mid 20s and either continue living at home or choose to move on to rent elsewhere. For young, first time buyers, whose reliable income can get them into the market, but not into peak lifestyle locations such as the CBD, the inner city, or beachside, rentvesting is the perfect solution.
Lifestyle is for Everyone
It is not a solution exclusive to young people however. Research has shown that more than half of buyers who are rentvesting are from the 35 to 55 year old age bracket, also looking for a wider range of lifestyle choices. Young professionals can rent a stylish inner-city apartment and cut back on the commute to their city office, whilst quietly monitoring an outer suburban investment property. Families can rent a 4-bedroom home in an ideal location and make their first steps into the property market in an area they can afford. Empty nesters can use part of the capital from the sale of the family home to buy a house in a regional growth area, then move into a low maintenance rental apartment to enjoy their new-found freedom.
Of Course, there are Pros and Cons
Rentvesting can offer great advantages to the right buyer, but it is not without its flaws. The most crucial thing to keep in mind is that a rentvesting approach is a long-term strategy. It can take a considerable amount of time for your initial investment to be realised through capital gains, so be clear on your long term financial and investment strategy. Research well and make sure you have considered all the risks you will be exposing yourself to.
The great thing about rentvesting is that you can be more focused on a low-cost investment, because you are buying with your head rather than your heart. Buying a property that you won’t actually call home, means you can make more objective decisions. You could start out with a smaller deposit than you might have thought you needed, as well as enjoy the fact that the mortgage is being covered by the incoming rent. The right investment and decent rent could also cover the property’s expenses.
When deciding on your investment property, be sure to follow the standard principles of investing – choose your suburb well, buy a property that is really well suited to the rental market and will attract the right kind of tenants. Location is important too, with tenants needing access to local facilities, shops, schools and so on. You have to be certain you can always tenant the property and that rental yields in the area will continue to cover your costs. Otherwise you may find yourself paying two lots of rent. Find a good property manager, who can advise you on things like how much rent to charge, liaise with tenants on your behalf and keep track on how the property is being maintained. There will be fees associated with their work so be sure to understand these in advance and factor them into your expenses of investment. There will also be other fees such as strata fees if you buy in an apartment complex, and property maintenance costs – add those to your budget expenses as well!
How we Buy Has Changed
Lifestyles have changed dramatically in the last 20 years. People are more mobile these days and may move a dozen times or more throughout their lifetime. Your housing needs as a university student differ from the needs you have as a young professional. The world is more accessible than ever before and pursuing overseas career opportunities has become much more common. The desire to settle and ‘nest’ that comes with marriage and family has a use by date and when the kids leave home and the decades of hands on parenting are over, the desire to scale back to a simpler life is common. Rentvesting means you can make all of these choices and more without having to buy a new house every time. You maintain the same investment, make new investments, contribute more to pay off the mortgage as your circumstances permit – all the while living whatever version of your life you choose to live.
Most importantly though, rentvesting offers greater tax advantages than home ownership does. The Australian Tax Office recognises and allows for costs incurred through ownership of an investment property, but not your primary residence. Rentvesting means that you can claim depreciation, as well as costs of repair and maintenance of the property (and appliances), that you would not be able to claim if you lived in the home yourself. There are also tax benefits if the property is negatively geared, which reduce your taxable income.
In the end, choosing to rentvest or not, comes down to personal values and the direction you anticipate your life moving in. If your values lean towards the more traditional and you want to build a family and a home, then rentvesting may not be for you. If you anticipate a life of change and variety and entering the property market at an achievable level is your priority, then rentvesting may be your ideal strategy.
DISCLAIMER: The following advice is of a general nature only and intended as a broad guide. The advice should not be regarded as legal, financial or real estate advice. You should make your own inquiries and obtain independent professional advice tailored to your specific circumstances before making any legal, financial or real estate decisions.