Your first home is rarely your forever home, nor does it have to be.
While some first home buyers may think the only way to crack the market is with a win on the lottery or significant support from parents, there are other avenues.
Picking the right path to enter the property market can depend on your lifestyle and finances. Here we explore some of the perks of rentvesting – investing in property, while you continue to rent.
What is rentvesting?
Rentvesting is a blend of renting and investing. It refers to renting a property where you want to live and buying an investment property in a suburb you can afford.
The idea diverges from a traditional approach of buying a home in which you live and pay the mortgage directly instead of spending a large part of your income on rent.
Why should first home buyers consider rentvesting?
As cities tend to offer more vibrant cultural activities, closer proximity to work and schools, as well as better access to resources and infrastructure, it’s no surprise they attract the bulk of our population.
However, as a lot of younger home buyers can’t afford to jump head first into these expensive inner city markets, they face having to leave this life behind in order to buy elsewhere – or they could consider rentvesting!
“Rentvesting can be an appealing strategy for first home buyers as it allows them to continue living where they choose, whilst at the same time getting a foot onto the property ladder,” Westpac’s head of strategy and product mortgages, Claire Scott says.
Rentvesting could allow you to maintain your lifestyle wherever you choose to live today, while still getting into the property market.
What are the pros and cons of rentvesting?
The biggest benefit of rentvesting – and the main reason people do it – is the aforementioned lifestyle maintenance. However, there are other pros.
Depending on the market and your personal circumstances, it can be far smarter financially to rentvest than to buy your own home and live in it.
With an investment property, you may be able to claim tax deductions on the interest charged as part of your investment loan and other expenses incurred related to your investment property. It’s recommended that you speak to your independent tax adviser to determine tax implications related to rentvesting that are applicable to your personal circumstances.
Given you will also be receiving rent from tenants to help pay your mortgage, financially, you may be better off – but this isn’t always the case.
To determine if there are financial benefits, Scott recommends doing your research and finding areas with excellent rental returns.
“When looking to buy an investment property, it’s critical that you do your research and understand the local market,” she says.
“Tools like Westpac’s Property Market Research tool can equip you with suburban knowledge like median prices, average rent and demographic trends.”
A big concern for rentvestors is the ability to effectively manage cashflow. Like any investment property there is an element of unpredictability that you need to account and plan for, like losing tenants or maintenance upkeep.
“It’s important that you understand all of the costs associated with being a rentvestor,” Scott warns.
“Aside from your initial purchase costs, like a deposit, stamp duty and legal fees, you must also factor in ongoing costs like council rates, insurance, maintenance and any tax requirements, as well as your own rental expenses.
“Managing cash flow is an important part of property investment so make sure you have a good understanding of your budget and get some professional advice.”
The best way to understand if rentvesting is the right choice for you is to speak to your bank and get the best, up-to-date advice on your finances.
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The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation.