You can do BOTH activities at the same time: property investing and renting, even though you’re a first-time home buyer. Normally, it would seem enticing to purchase your first home when you have enough savings already to cover the deposit, particularly in today’s market, but this is not always a wise decision.
By doing ‘rentvesting’ – you can always go for the high ground in renting and investing simultaneously. A win-win situation!
What do we mean? Read on and let this guide you to a successful rentvesting if you’re thinking of plunging into it anytime now.
Reinvesting – what it is and why it is popular?
Rentvesting is so popular nowadays. It refers to investing in a property while you’re renting in another property as your home. In other words, the mortgage you have is being supported by another person, your renter.
It’s not for everyone, especially among the first-timers in home buying. The move means riding on the property ladder by purchasing an investment that you don’t inevitably mean to live in but still can afford as you continue to rent in your desired location.
Rentvesting is a good opportunity for the young ones who want to realise their dreams of being a homeowner, without having to make a lifestyle change. It has its benefits for a wide range of buyers so it is quite popular.
Rentvesting is a great stepping stone to lead people to success as housing affordability remains a major concern and prices continue to rise.
It appeals to those priced out of their preferred suburbs, especially in Sydney and Melbourne’s increasing housing markets.
Normally, when property prices soar, it will be tougher for anyone to purchase their most ideal place of residence. But this doesn’t imply that they could not buy a property at all. Truth to tell, most Australians are capable of buying properties although they just haven’t done this before. Instead of waiting for too long to have a larger deposit and then buy, what rentvesting does is to allow people to search for a property that fits their budget or savings.
The first purchase usually serves as their much-required leverage to be able to afford them to have their dream house in the future. It is quite practical as you get into the market sooner than you think.
Benefits of Rentvesting
- It is less expensive to rent.
Not always 100% true but the typical weekly rent is often much lesser versus the regular mortgage repayment. A reasonable home loan may be pegged at $200 up pricier vs. the typical rent per week. This suggests that you can live somewhere cheaper by renting while getting some cash flow simultaneously from your investment property.
- Investing = Cash Flow.
You may be wondering why rentvesting is a good move when you have to pay a mortgage. Investors get their tenants’ rental income, thus, decreasing their mortgage repayments.
These tenants in a way are covering for your property’s mortgage as it appreciates. Owning one property for investment is not too difficult as you will also have tax benefits.
- Investing has its tax benefits.
Per ATO’s guidelines – some investment expenses are claimable as tax deductions. One of these deductible expenses are your loan interest repayments. While you cannot deduct the principal portion of your loan repayment, the interest charges that accumulate on the loan amount can be deducted. Thus, interest-only loans are a popular option among investors as the interest charges are tax deductible.
Other expenses that you can normally deduct on your tax return are the costs for both management and maintenance, as well as borrowing expenses. These are:
- Advertising for prospecting new tenants;
- Loan fees and bank charges;
- Home, landlord, and contents insurance fees;
- Loan establishment charges;
- Body corporate fees, cleaning fees, and council rates;
- LMI or Lenders’ Mortgage Insurance (if applicable);
- Fees for Mortgage Brokers (if applicable);
- Legal expenses and land taxes;
- Repairs and maintenance costs;
- Stamp-duty-based vs. the mortgage.
Another thing to consider is negative gearing. Because if there’s a property loss, you can have a lesser taxable income. Therefore, an investment property seems to be economical in a way, plus in other instances, it can even pay extra for the rent you’re paying for.
Ask help from a professional like an accountant for guidance.
- You don’t need to give up your current lifestyle
Let’s say your end goal is to have a lovely house in the suburbs, and you have the resources to acquire it. But you are not ready to live in it yet, as perhaps you are still single, or you do not have any children yet, or you want to live within the city still. It is typically far more affordable and easier to find a property to rent in these popular and desirable locations than buying a house that you can afford.
By doing rentvesting, you can purchase that lovely house further out from the city and have it rented out temporarily until such time you become ready to live in it. You have a “ready-to-move-in” property waiting for you.
Thus, rentvesting is generally suitable for people with temporary and short-term lifestyle aspirations and want to get into long-term property investment. This is the reason why it’s popular among young first-time home buyers who prefer a leisurely and flexible kind of lifestyle.
- You can accumulate equity
If the property you buy appreciates or makes capital gains, then your equity is accumulating in that home even without you living in it (as you are renting in your current desired location). And having equity in a property can assist in refinancing and/or buying a subsequent property.
Drawbacks of Rentvesting
- Ongoing costs can be high.
Not all investment property expenses are tax deductible. And deductible expenses such as maintenance can require administrative efforts on your part (being the landlord). Such as when there are broken or damaged fixtures, it is your responsibility as landlord to handle and arrange for the repairs.
Aside from the non-tax-deductible expenses, you may likely encounter some unforeseen costs, too, like damages to property due to natural causes, which can be costly and expensive. There’s more to consider in the ownership of rental property than having monthly repayments, and it can even cost a lot more than cash.
- You can miss out on first home buyers’ grants.
When you are a first home buyer, buying a property for investment can give you no access to the ‘First Home Owner Grants.’ This would mean requiring you to not have any residential property beforehand as some states require. Such grants are not that big – between $6K to $25K, but they can also provide some beneficial stamp duty concessions. It could also mean losing the chance to apply for the latest ‘First Home Loan Deposit Scheme’, a project of the Morrison Government, though this is not certain yet.
- You are covered by Residential Tenancy Laws.
The downsides of renting are defined clearly by now with those who echo that familiar adage – “Rent money is dead money!” but you also give up some controls whenever you choose to rent:
- Landlords can increase the rent at any given time;
- You do not have freedom to do any property’s physical changes without permission;
- You need to accommodate inspections and put up with body corporate– that’s a given.
Rentvesting will also mean you may have to endure a little longer with that intolerable landlord, but of course, this is not a concern if there’s a harmonious relationship between the two of you.
- You need to pay CGT (Capital Gains Tax).
For your investment, you’re obliged to pay CGT based on your property’s revenue if you decide to sell it. But currently, there’s a 50% discount applicable to properties held for more than a year. Thus, a $ 150,000 yield would only be taxed on $75,000, although discounted, this is still a tax nonetheless.
PLUS: Owner-occupied properties do not have CGT.
- There are inherent risks.
Every investment has inherent risks and investing in property is certainly not exempted, as shown in the market blows in the most recent years.
Some areas have recorded strong gains, while some – ‘year-on-year losses’. The average 10-year property return is about 6-8% based on sources.
What we recommend is that when you decide to do rentvesting, it is a MUST to consider among all factors – both the location and the property itself. This is too costly a blunder to make so be cautious.
WHO should do Rentvesting?
While this strategy works best for young buyers or some who couldn’t afford to buy their dream homes yet in their desired locations, other people are lured to rentvesting for various reasons.
There are people who are not yet prepared to attach themselves to one abode, especially when international borders open soon. If they want to travel to other places and are unsure of where they want to live down the road, doing rentvesting allows them to be flexible.
For the career-driven buyers who can very well afford the ideal properties, they are doing rentvesting so they remain free and open for job opportunities in other states, even overseas. This is also a good starting ground for empty nesters to build their savings if they couldn’t manage to retire just yet.
Other people in said age bracket will be selling their huge family home, with that equity turning into a large amount of money. They will then find a rental property to live in and use the funds to purchase maybe 2-3 or even 4 investment properties in different strategic locations to boost their income and later to be used for their retirement. This is like putting the family home to much better use, so in about 10 years, they’ve had multiple properties at work for them.
What should you consider as a Rentvestor?
While owning an investment property – you have several obligations as a landlord, plus the fact that you are a tenant yourself. You will have to consider the repair and maintenance costs if you have an older property and the actions you need to take if your tenants leave the house or mistreat the property. Find a competent and trustworthy property manager who can handle any issues and problems that may crop up in your property.
- As you find a property, make sure your research will include looking for a tenant in mind. Search in populated and growth locations with vital amenities like public transport, schools, hospitals, and more.
- Ignore personal biases like the place where you reside and your views on the property. The purchase is all about looking for and finding the perfect investment.
- Your goal is to buy in an area that isn’t teeming with other investment properties so as not to compete with your market for tenants.
- Pay attention to getting a detached, low-maintenance house to maximise capital growth. If this will not suit your budget, find a unit with land on it. We all know that buildings depreciate while land appreciates.
- Make sure that what you plan is about to break even, at least. Crunch the figures to check if the property’s rental returns will cover the mortgage repayments.
- Take into consideration the extra costs of both maintaining your home and your obligations being a landlord at the same time.
- If you’re living in a property that’s yours, take into account that it could be hard for you to shift to being a tenant.