What is Rentvesting?
Rentvesting is a growing trend in property investment where you invest in your first home with the intention of renting it out. A rentvestor simultaneously lives in a rental property located in their chosen suburb, while renting out an investment property they own found at a different suburb.
Most people get into rentvesting to get on the property ladder by buying property they can afford. Typically, rentvestors target the up-and-coming neighbourhoods while prices there are still within their budget. Then this property gets rented out to create an extra income stream. In the meantime, the rentvestor will remain at the location of their choice, usually near the CBD, so as not to compromise their lifestyle, their commute to work, and the amenities they enjoy.
With the assumption that property prices increase in time, the added equity from the property invested on can help fund the rentvestor’s own home in their dream location.
Here’s a good example:
John, 25, fresh from university, has recently started working full-time. From his previous part-time work, John had managed to save around $80,000 he can use as a deposit to invest in property. His dream is to buy a penthouse in the CBD. However, prices in this area start at $1M and John would need at least $150,000 as a deposit just to apply for a home loan. And even then, his income would not be sufficient enough to afford mortgage repayments.
John is really keen on investing in property, but he isn’t fond of the idea of moving out of the city and all of its conveniences. By way of rentvesting, John can get into the property market with the money he currently has instead of waiting around to have enough saved for a bigger deposit.
John finds a lovely apartment in the CBD to rent for $2,100 a month. He also finds a property in Ballarat for $400,000 that he plans to invest in. The $80,000 he has saved up is enough to make a 20% deposit on the Ballarat property. If this property experiences capital growth as predicted in the next few years, John can use the equity from this investment to buy another property and build his portfolio.
Live Where You Want, Invest Where You Should
Rentvesting makes it possible for you to live in your desired location, while also owning property that generates income. Essentially, when you become a rentvestor, you receive the benefits of both quality of living and property affordability.
In rentvesting, your money is put to work in a real estate investment, without the need to compromise your living standards to get in on it. But as with any property purchase, you have to make sure that rentvesting makes financial sense for you. Use a borrowing-power calculator to know how much you can take out in a loan and which property you can afford to invest in.
Upfront costs and a downpayment on the property you will be leasing (usually 10% to 20% of the purchase price), plus the monthly mortgage repayments, and even maintenance costs, all need to be considered. You need to make sure you will be able to afford this strategy in the long term.
Location is absolutely necessary. In choosing an area to invest in, it’s always good to consider the area’s close proximity to schools, parks, and the CBD. This would add considerable potential to the property.
Consider these Advantages of Rentvesting
1. Tax benefits
In rentvesting, all of the expenses associated with your investment are tax deductible. This is probably the biggest advantage of rentvesting. The list of tax-deductible expenses includes home loan interest repayments, insurance council rates, property maintenance, depreciation*, and more).
*Depreciation is a significant tax-deductible expense for investment properties.
2. Lower debt in most cases
A rentvestor would be targeting properties substantially cheaper and located outside the city. This would mean a lower deposit and therefore, a lower home loan debt.
3. Rental income
By leasing your asset, you receive income from your tenants and this could help cover the mortgage payments on that property while it begins to appreciate.
4. Buy in high capital growth areas
Capital growth is the increase in value of an asset or property. In rentvesting, it’s important to choose a property that has the potential for capital growth. Areas outside the city but are in close proximity to schools and parks tend to appreciate in value, and also attract a good number of potential tenants.
5. Live closer to amenities, work, and lifestyle
Rentvesting makes it possible for you to live where you feel most convenient. If your current residence within the city is a mere 15-minute commute to work, and is accessible to your go-to shops and restaurants, moving away from this area would throw you off your routine and lifestyle. Rentvesting would then be the most valid route for you to start making your money work without having to sacrifice your quality of life.
The Disadvantages to Rentvesting
1. Your residence is less secure
As a renter, your primary residence is still someone else’s property and you can still be forced to move out at the end of your lease.
2. Capital gains tax (CGT)
You are generally exempt from paying CGT if you own the house you are living in. However, you are usually liable to pay CGT on the profit you make from the sale of an investment property.
3. Subject to market risks
Rentvesting is not without risks. You could experience a lull or a vacancy at your investment property, or the rental income from tenants may not be sufficient if your mortgage increases. Lastly, the value of your investment property might not increase and you might eventually be forced to sell it at a loss. As for your rental, at the end of the day, your place of residence is still subject to the whims of your landlord.
4. Property Maintenance costs
Because you are a landlord yourself, you will need to set aside money for repairs and maintenance costs. You will also be spending to advertise the search for tenants, and also cover land tax, council rates, and insurance.
Who pays off your property?
If you choose to rent out the property you invested in, the rental income you will receive can help cover most of the mortgage. This is as opposed to buying property to immediately live in and occupy, whose entire cost would be coming from you.
If you pick the right property, you can even maximise the tax benefits and generate a passive income for yourself.
A plus side to the rentvesting setup is that it actually encourages you to save your money by directing it into mortgage repayments which would then generate wealth creation by way of collecting rent.
A Lifelong Rentvestor
Reventon Founder & CEO, Chris Christofi, has been encouraging Australians, who would like to get their foot in property investment, to get into rentvesting. A lifelong rentvestor, Chris has been living and breathing property since 1999 and has a considerable property portfolio with over $500,000 per annum in rental income.
Chris’s family hails from near the Taylors Lakes area in Victoria, and he could have purchased his first property (owner-occupied), in that area for $260,000. Instead, Chris chose to buy an investment property in Tweed Heads, New South Wales for $183,900 that was rented out for $220 a week.
After six years, Chris was able to sell this property for $328,000. Chris’s investment in Tweed Heads left him with a $170,000 profit plus he was able to make use of the tax benefits associated with an investment property. He then used this money to start building his extensive property portfolio. The profit would have been substantially lesser had he chosen to purchase his own home in Taylors Lake, along with no tax benefits.
Is Rentvesting the Right Strategy for You?
Rentvesting may not be a lifelong strategy, but it is a good strategy to help you enter the property market. More importantly, your purchasing power does not affect your quality of life, it even improves it with the added income stream. The key is to make sure this strategy lines up with your current financial circumstances, and your future financial goals. Essentially, you get to “Live where you want, and invest where you should”.
And, as is the case for any type of investment, location and education are the tools that can help ensure an investment’s success.
Our team of property advisors have access to the latest real estate research data and have identified the areas that are poised for high capital growth rates: South-East Queensland and regional Victoria.
To know if rentvesting is the right strategy for you, contact our team and a property advisor will be in touch with you. No cost. No commitment.