It’s become quite evident in recent years that first home buyers are finding it increasingly difficult to purchase their first home. This is due to the lack of housing affordability, especially in areas closer to the CBD where they may be working and want to spend the majority of their time.
To find a solution to this ever-growing problem, the rentvesting concept was devised.
So What Is Rentvesting?
Quite simply, rentvesting makes it possible for first time home buyers to enter the property market by purchasing a property they can afford but still continue to rent and live in the area they would prefer.
Many young professional couples and singles tend to work close to the CBD and this affords them a certain lifestyle which they would be reluctant to give up. The cost of property in these areas is so high however, that many simply can’t afford to purchase the home that they want to live in.
And even if they could afford the mortgage repayments of their ideal home, they struggle to save enough deposit to be able to qualify for a mortgage loan of this magnitude.
The simple solution therefore, is to purchase an investment property in an outer suburb at a much more affordable price and keep renting in the area that they want to live in. By doing this they have the benefit of an investment home which is increasing in value and still being able to enjoy the lifestyle that they want.
Plus, the rental payments they receive for their investment property will help to pay the mortgage repayments and additionally, the interest payments can be tax deductible.
What Considerations Do You Need To Take Into Account Before Rentvesting?
As with any type of investment strategy, there are certain considerations which you must evaluate before you take the leap into rentvesting.
- Firstly, you need to fully evaluate your own budget and work out whether you really can afford this strategy. For example, if you purchase an investment property and for some reason it’s empty for a period of time, can you afford to meet the mortgage payments as well as your own rent?
- What would happen if there is a rise in interest rates on investor loans? For example, just a 1% rise in interest rates on a $300,000 mortgage could easily equate to an extra $100 per fortnight. Does your own budget have the capacity to cope with that?
- You also need to take into account the tax implications of having an investment property. On the plus side, you can claim the interest payments on your annual tax return, however if you sell the property, you will be liable for capital gains tax.
- Another very important consideration is whether you have the time to do extensive research on the best area to purchase your investment property. If you’re looking for long term renters you want to ensure that the area has plenty of amenities like childcare centres, schools and medical facilities.
Plus you want to make sure that there is plenty of growth potential in the area so that your investment property increases in value over time. This will mean that when you’re ready to purchase your dream home, you’ll have enough equity to make this an easy and affordable process.
What Are Some Of The Advantages Of Rentvesting?
Although there are many considerations to take into account before you venture into rentvesting, there are also many advantages. These include:
- You can break into the property market much earlier and with a smaller deposit than you would be able to if you were buying in an area where you want to live.
- You can live where you want and enjoy the lifestyle that you’ve become used to without having to take on the responsibility of a very large mortgage which may limit your lifestyle.
- With rentvesting you can start to build an investment portfolio. This allows you to create wealth for you and your family and will allow you to purchase your dream home in the future.
- Rentvesting also allows you the flexibility of where you live. If you change jobs or your circumstances change, you can just move to wherever you want without having to worry about selling your home and all the additional costs this will entail.
- This also gives you the freedom to move around if you want to, especially if you haven’t really decided where you finally want to settle. You can easily move to another city or even travel overseas, especially if your work is flexible or you’re primarily a freelancer.
- Purchasing an investment property as opposed to buying a home you’re going to live in allows you to be ruthless regarding the areas that you purchase your property in. In fact, you might even find that it’s more savvy to buy a property in another state because of the predicted growth potential.
Are There Any Disadvantages To Rentvesting?
With any type of investment strategy, there are also usually some disadvantages which you should consider. With rentvesting these include:
- It may appear to be counter-intuitive to some people to buy an investment property before they purchase their own home.
- Many people will also consider that ‘rent money is dead money’ and this could certainly be a deterrent for some.
- Because you don’t own the home that you live in, it may be difficult to leave it if the landlord decides that he or she wants to sell the property.
- The rental home that you live in is not your own home so you can’t make any type of improvement to it.
Overall, rentvesting appears to be the ideal solution for many first time home buyers to get into the property market far sooner than they might first have thought. You can purchase an investment property in an affordable growth area but still live where you want to and enjoy your current lifestyle.
Just remember though, if you are considering this strategy, to first talk with a financial adviser or mortgage broker who can guide you into making the right decision which will suit your needs now and into the future.