Are you ready to buy your first home? You have everything in place, but your dream location is just out of your reach. That doesn’t mean that you have to move away from your ideal location, or even give up on the dream of owning a home. Instead, you just need to get creative. Rentvesting is something that more and more people are doing now in Australia, and it’s helping them achieve their goals. Here’s what rentvesting is, and how you can use it to your advantage.
What is rentvesting?
In a nutshell, rentvesting is the strategy of renting a home yourself, while buying a property to rent out to others.
On paper, it sounds rather counter intuitive – if you’re going to buy a property, why not live in it yourself?
In practice though, this strategy allows you to live in the house you want, while owning a property to build out your portfolio. With house prices being so high, particularly in locations close to the city, buying a house is difficult, especially as a first time buyer. Instead, people are buying property in an area that is more affordable, and renting a home suited to their lifestyle. The property you own can be rented out to tenants to help pay off the property, and possibly sold at a later stage for a profit.
For example, you want to buy a house in one of the inner Sydney suburbs, but the prices are above your budget. By rentvesting, you can rent your dream house in inner Sydney, and then purchase a property in another location that has more reasonable prices. This way you can live in the house you want, while still being able to own a property.
There are lots of benefits to rentvesting especially giving you the freedom to live in your ideal home, while building out your property portfolio. Here are some other benefits of rentvesting:
Get your foot in the property market: These days, first time buyers are putting off buying their first home later and later. Typically, they’re waiting to be settled into their careers, or to be earning more before they commit to owning a home. Plus, they want to buy their perfect home. This can be difficult, especially if their perfect home is more expensive than they thought.
Instead of waiting, rentvesting helps you get your foot in the property market. By buying a more affordable property (even if its not your ideal home), you can start building your portfolio. You’ll have a property that’s your own, giving you the equity you need to buy your own home somewhere that’s perfect for you later on. It’s a great way to get on the property ladder.
Try before you buy: You may not have the means to buy in your desired area right now, but you can certainly rent there in the mean time. If you’re rentvesting, you’ll have a lot more flexibility when it comes to where you live. It’s often easier to find somewhere to rent in the area, rather than trying to buy right away.
This can also help you determine if the ideal location and house meet your needs prior to actually purchasing your ideal home. While you rent, you can get a feel for the area you’re living in. It’s a unique way to scope out an area before you buy. As you live there, you’ll see what it’s really like to spend time there. Is it not what you wanted? Not a problem. As you’re renting, you can simply move at the end of your lease and try somewhere else.
Flexibility in circumstances: When you’re renting, you have a lot more flexibility. Life isn’t always certain, and when you’re renting you are able to adjust as your circumstances change. For example, if you move around for work or travel a lot, you can take a shorter lease and change homes to a closer location when the time comes.
You can change up your housing situation depending on your circumstances quite easily, too. If you are more financially comfortable, you can move to a larger house or better location. On the other hand, if your situation is not great, you can move to a more affordable home. That’s a luxury you don’t have when you’re living in a property you own.
Tax benefits: There are financial benefits to rentvesting that you can use to your advantage, such as tax benefits. You may be able to claim interest payments on your investment property, expenses, rental costs including insurance and advertising and depreciation costs as a tax deduction. Refer to the ATO website for more information.
Save up for the home you want: The income you get from renting out your investment property can be used to pay down the mortgage, and even your own renting costs if you are able to rent it out for more money. Also, over time if your investment property increases in value, you can get a profit once you sell it to help with the payment towards your dream home.
Take advantage of higher yielding suburbs: When you’re looking for property to rent out, rather than to live in yourself, you will evaluate properties differently. You can look at properties that are in locations away from your desired location. Some of these places may offer a much higher yield. The location or properties may not be what you’re looking for in terms of your own home, but they’re perfect for renting out. This gives you a lot more flexibility and opportunity when it comes to where you buy your investment property.
Drawbacks to rentvesting
While there are many benefits to rentvesting, there will also be some drawbacks. After all, it won’t be for everyone. Here are some drawbacks you need to know about before you decide to rentvest:
Missing out on some benefits: There are some benefits that you may miss out on. For example, if you are buying your first property as an investment, you won’t be able to get the first homer buyer grant that could have been available to you. You’ll also miss out on the primary residence Capital Gains Tax exemption if you sell your investment property.
You’ll need to think carefully whether the losses you’ll make will be worth the benefits you gain by rentvesting. It’s a good idea to speak with a tax accountant or financial planner before you do so, so you know exactly what you’ll lose and gain by doing so.
No personalisation: One of the biggest reasons for buying a home is the ability to personalise it and make it your own. Many buyers love being able to put their own stamp on a home. When you’re rentvesting, you’ll be living in a rental property and won’t be able to customise it to suit you or improve the home.
Higher rates of interest: There are some differences between buying a property as your primary residence, or one as your investment property. One of them is that the bank will charge you a higher interest rate on an investment property, compared to a property that than you would live in.
You will have to consider whether it’s worth paying this extra interest. Will it eat into your savings, or is it an acceptable cost? That’s something you’ll need to decide before you buy.
Rental risks: As you’re buying a property to rent out, you’re going to be subject to additional risks. For example, you may have tenants that fall behind on the rent, or there may be an unexpected large repair bill somewhere down the line. These are risks that all owners have to accept, but you’ll have to decide if you want to deal with it, too.
Is rentvesting expensive?
You would think that it is more expensive to rentvest, rather than to buy outright. After all, you’re paying both rent and a mortgage payment every month. However, this isn’t always the case. Let’s take a look at an example and see how the payments work out.
Scenario 1: Buying a home to live in
Let’s look at the average price of a Sydney house, which is approximately $1,143,000 according to Domain House Price Report for June 2020. Assuming your dream home can be purchased for the median price – with the standard 20% deposit saved, you’ll need to get a home loan of $914,400 to purchase the house.
A home loan for that amount, with a 3% interest rate p.a over 30 years, will cost you $3,856 per month.
Scenario 2: Renting
Let’s start by looking at renting a property for yourself. Say you want to live in a premium apartment in Sydney CBD. According to the June 2020 FACS rent tables, the median price for a 2 bedroom apartment in Sydney postcode 2000 is $750 per week or $3,250 per week.
This is lower than the home repayment in Scenario 1 by approximately $600. However, by renting instead of buying means you won’t own any property at the end.
Scenario 3: Rentvesting
Consider Scenario 2 – but also contributing the savings from renting to invest in a property.
With about $600 difference, you can probably afford to buy an investment property for about $600,000. Again, with a 20% deposit, you would be borrowing $480,000 with a repayment of $2,076 over 30 years at 3.2% interest.
With the median yield at 4% as at June 2020, you could also expect rental income of $21,000 per year or $1,750 per month. All of this can go towards your loan repayment, leaving $326 you need to pay out of pocket.
However, even after property expenses, it should still come after the $600 savings you have made from renting instead of buying. What’s more, you’ll be living where you like instead of where you can afford and you’ll have a property of your own.
Comparing the scenarios
Starting with potential returns that can be obtained by selling your own property (capital gains). Let us assume that Sydney property prices will increase on average of 5% per year for the next 10 years. If you purchased your dream home for $1,143,000 property, it could be valued at $1,861,826 in 10 years – a gain of $718,826.
Now let’s compare this with scenario 3 (rentvesting). From the example above, you buy an investment property valued at $600,000. Assuming the investment property is purchased in a high yielding location, there will be an 8% increase in property value each year (as opposed to the 5%). After 10 years, the investment property will be worth $1,295,355. This is a gain of $695,355.
Buying a home
|Scenario 2: Renting||Scenario 3: Rentvesting|
|Monthly spend||$3,856 mortgage repayments||$3,250 rent||$3,576 |
($3,250 rent + $2,076 mortgage repayment
– $1750 rental income)
|Property purchase price||$1,143,000||–||$600,000|
|Property value after 10 years||$1,861,826||–||$1,295,355|
|Capital gain from Property||$718,826||–||$695,355|
Looking at the numbers, even though your investment property is not worth the same value as the house you could have bought to live in, you would still have a good return on investment and would be in a better position to buy your dream home.
However, you should note that there are a number of assumptions around this example and there will be variations depending on the economy and your own circumstances. We hope this example gives you an idea of the financial benefits of rentvesting.
So is rentvesting for me?
There are many benefits to rentvesting, and it’s a great idea for those who want to start their property portfolio but aren’t ready to buy their own dream home yet. It can work out better financially in the long run, and you can make cash on your investment for as long as you have it.
In some cases, rentvesting won’t be the best option. If you’re ready to settle down, it doesn’t make much sense to keep renting and lease out the property you own. If you don’t want to deal with the extra stress or the loss of certain benefits, then it won’t be for you.
If you’re interested, the best thing to do is look at your situation and balance out the pros and cons. If you decide that rentvesting is for you, you can take advantage of it to start investing and get ahead.
Important: This article is provided for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Seek personal financial advice before making any investment decisions