Most Australians come to a time when they start to ask themselves, "Should I buy a home or should I continue renting?" The question stems from two things: their current lifestyle and the financial capabilities they have for purchasing a property.
It is hard to settle down in a place away from the lifestyle that you have grown accustomed to. The financial requirements for renting a home near a big city are not the same as committing to a mortgage for a house. Perhaps due to the skyrocketing prices in cities like Sydney and Melbourne, many Australians feel like they do not really have any options but to continue renting.
However, there is a growing trend amongst Australians. They are starting to take advantage of owning a rental property, using it as a boost to help them climb the property ladder – otherwise known as rentvesting.
What is rentvesting?
Rentvesting is a strategy wherein you buy an investment property in a place you can afford to buy while renting where you want to live.
This is a tactic that enables you to still live in a place where buying a home might be out of your budget, while at the same time holding a property in a location that suits your budget.
When is the right time to rentvest?
Frankly speaking, there is no perfect time to jump aboard the rentvesting train. However, for property expert and Let’s Get Real author Luke Harris, the right time to rentvest is whenever you feel like you are comfortable postponing owning a home to achieve your investment goals.
"Rentvesting involves renting when you could possibly buy a place to live in, so it’s a form of delayed gratification. Of course, this can be uncomfortable, and renting gives a little less certainty than buying as an owner-occupier,” he said. “Not all rentvesters see that as a bad thing, however."
What are the pros of rentvesting?
Rentvesting is technically an investment strategy — it allows you to enter the property market by acquiring a property in an area you can afford. It saves you time by giving you a head start in your ownership goals.
"The number-one advantage for me is that it’s like a forced saving, in that having an investment property whilst you rent focusses your attention on wealth creation rather than buying expensive things for your own home," Harris said.
It also gives you an opportunity to live in places where buying is not ideal due to skyrocketing purchase prices. Assuming that the area that you want to live in has a relatively affordable rental price, then you will be able to take advantage of the location without having to commit long-term on a huge mortgage.
At the same time, you are already building equity with the investment property you have purchased.
Tax benefits are also something to consider when you decide to take on rentvesting.
"Of course, your own home is not tax-deductible, and so rentvesting may give you tax benefits that you wouldn’t otherwise get which gives you the chance to build your portfolio faster," Harris said.
When you invest, you can actually claim interest payments on your loan as a tax deduction. Other expenses related to your investment are also tax deductible. These items will help you cover the costs of managing your investment property.
What are some of the downsides of rentvesting?
For Harris, the biggest uncertainty in rentvesting is that you may need to sell or move into your investment property from time to time.
"The problem with that is that you may need to move! To a lot of people that can be fun and a chance to try a new street or suburb, but as you get older people are less likely wanting to move every time a lease expires," he said.
A possible solution is for you to try and negotiate a longer lease.
"Or speak with the property manager about the intentions of the owner and if they plan on selling or doing anything else that may affect you staying on for a longer term — if of course, that is a concern to you," Harris said.
Another disadvantage is that you may not be eligible for first-homebuyer grants.
If you believe that rent money is dead money, then this route may not be practical for you. Some think that buying an investment property first is counterintuitive. In this case, you really have to study and carefully plan your approach to get the most out of rentvesting.
"Ultimately this will depend on your goals and what you are trying to achieve,” Harris said. “If you are looking to settle down, have a bunch of kids and not move for 10-20 years, then rentvesting may not be the right strategy for you. If you are young and mobile and are happy to rent whilst you build the portfolio of your dreams, then perhaps that is a better outcome. Everyone’s situation is different, but of course, from an investment perspective alone, rentvesting is a far better choice to fast-track your wealth creation."