Published 30 May, 2023
We all have a vision of our dream home, but unless you have a windfall or are fortunate enough to earn a very high salary, this type of home can feel out of reach. The problem is the cost, firstly of the deposit and secondly the mortgage repayments. However, there is a way to start your journey to your dream home by using a strategy called ‘rentvesting’.
What is “rentvesting”?
You don’t have to buy a property to live in, even if it is your first/only home. Rentvesting means that when you buy a property, you rent it out rather than live in it yourself. Then you also lease a place to live in.
Doing this can allow you to stay in the area you want to live in and be near to family, school or work while breaking into the property market in a more affordable postcode.
For example, you might want to live close to your city’s CBD but not have the money you need for a deposit on a property in the area. If you do have some savings, however, you might be able to buy further from home or even in a different state. If this is a viable option for you, it can help you break into the property market sooner.
What are the benefits of choosing to rentvest?
If you’re struggling to save a deposit or afford a mortgage in the location you want to live in, rentvesting can provide a solution.
By investing somewhere cheaper, you can get into the property market sooner and start building equity.
- Grow your portfolio
Rentvesting is an opportunity to add real estate to your investment portfolio sooner.
If you rentvest and your holding costs are reasonably low, you may be able to add another lower cost property to your portfolio, especially if you build equity quickly.
- Tax benefits
Landlords are entitled to a number of tax exemptions, and when you rentvest, you become a landlord.
You may be able to claim deductions related to mortgage interest, property management fees, and repairs and maintenance costs. This will reduce the expenses involved with owning the home.
Always talk to your financial planner and accountant to make sure you understand the tax benefits you are entitled to.
- Capital growth
Finally, rentvesting offers the potential for capital growth.
By investing in a property, you’re taking advantage of the potential for the property to increase in value over time. This can help grow your wealth and provide you with a valuable asset for the future.
You’ll have the option to sell your investment and use the equity you have earned as a deposit on a larger home, or to leverage the equity you have for an additional loan.
There are a couple of minor drawbacks that you need to be aware of when it comes to rentvesting.
First is the costs involved if you fail to find tenants for your rental property and have to cover the mortgage payments as well as your own rental costs.
The good news is that in the current property climate in Australia, this is unlikely to be a problem. If you work with a reliable property manager, you should find you don’t have to worry too much about finding reliable tenants.
Next is the fact that, if you are a first-time homeowner, as many rentvesters are, you may miss out on the First Home Owner Grant offered in your state. Most such grants require you to live in the property for at least a few months. This leaves you with the option of either sacrificing the grant or finding a way to live at the property for the required period.
Finally, there is the fact that you have to keep renting yourself and won’t have the benefits of owning and living in your own home. You can work this to your advantage and save yourself the costs of having to repair a larger, more expensive home yourself.
Where to start?
As a financial decision for your future, it’s best to seek professional help to set yourself up in the right direction.
Your financial advisor and mortgage broker should be your main points of contact regarding this decision. They will help you work out a strategy and put together the funds for a deposit, then walk you through the process to apply for a loan.
If you are new on your wealth creation journey, you can contact Landen’s Wealth team for a consultation and they’ll advise you on the right approach. Our team is well-versed in Financial Planning, Accounting, Lending & SMSF.