With the property market becoming harder to access, rentvesting has become an increasingly popular strategy.
Entering the property market looks very different today than it did 50 years ago.
Back in the 80s when parachute pants and jazzercise was all the rage, the Great Australian Dream was to own a family home.
But it’s fair to say that at that time, home ownership was a much more achievable goal than it is today (despite what your parents might say!).
In the mid-80s, the median earner would fork out3 times their annual income for a home. Today, the median earner needs to fork out more than 8 times their annual income for a home.
So as home ownership became more difficult, people started opting for a different kind of property ownership as a way of entering the property market and building wealth…which began the trend of rentvesting.
What’s rentvesting?
Rentvesting is when you rent somewhere where you want to live (but can’t afford to buy) and you buy somewhere where you afford to buy (but you don’t want to live).
Rentvestors will rent out their investment property to help offset their mortgage. The idea is that you buy in a location that may not be suitable for you right now, but has high growth opportunities.
Pros of rentvesting
As Hannah Montana once said, “you get the best of both worlds.” She wasn’t necessarily talking about rentvesting, but she very well could have been.
With rentvesting, it can be possible to live where you want while still being able to build wealth and have your foot in the property market.
And for those who prefer the flexibility of moving around frequently, but still want a stake in the property market, rentvesting is one way to do that.
If you’re not earning profit through your investment property, you might be able to claim losses such as depreciation expenses as well tax deductions. This is called negative gearing.
You might also be able to claim costs such as stamp duty and conveyancing fees depending on your situation.
Saving up for a house deposit can be a really daunting task, and even more so when you’re saving up for a residential property that suits your lifestyle needs.
Inching towards a deposit for your dream home can take excruciatingly long, and in the process you can lose out on time in the property market.
But when you’re buying an investment property to rent you’re probably considering rental yield and capital appreciation more than the colour of the splashback, or how the cabinets have been designed.
This can often make buying an investment property easier, more affordable, and make it a little bit easier to enter the property market earlier than they otherwise would.
This way, you’re able to begin compounding your wealth earlier, which can one day be used to help you buy your dream home.
Cons of rentvesting
Rentvesting does make it easier to access the property market, but that doesn’t mean it’s not a costly journey. Not only are you paying rent at your residence, but you’re also paying:
Yikes!
Often, being able to afford these costs does come with some lifestyle changes, which need to be taken into account when you’re evaluating if rentvesting is a good investment opportunity for you.
As a renter, you don’t need to worry about covering maintenance and repair costs, but as an owner of an investment property, those costs become your responsibility.
You also need to be prepared for unstable rental income as an investment property owner. If the property is not in a high-demand area, you might not earn any rental income for an extended period of time.
And let’s not forget, there’s always a teeeeny risk of housing an unreliable tenant who might not pay rent on time, might damage the property, or might turn your property into a maze-like labyrinth (yes it’s happened before).
When you’re selling an investment property, while there are juicy gains to cash out on, there’s also capital gains tax to think about.
Usually, if you’ve sold your investment property for a profit, you’ll need to fork out capital gains tax on that profit, unless you’re entitled to certain exemptions.
And that capital gains tax can leave the gains looking a little less juicy.
When you’re selling your main residential property, capital gains tax doesn’t apply. The ATO website defines what that means, and what exemptions can apply.
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