Rentvesting – which sees buyers rent a property where they want to live and buy an investment property in a suburb they can afford – is a growing trend across Australia, challenging traditional thinking about home ownership. It is a way forward for people who want to break into the property market, without sacrificing their lifestyle.
With rentvesting, investors can get the best of both worlds because they can afford to rent where they want to live and put their “spare” funds to work by buying elsewhere and renting that property out.
For many, rentvesting is a compromise they can live with when it comes time to make the call between buying or renting. But is the strategy simply a compromise or can it be even more; a smart, long-term wealth-creation strategy?
Lifestyle: If it’s too expensive for someone to buy where they want to live, they have the option of renting through rentvesting. There are many reasons why you may want to live in a particular area; better schools, a safer neighbourhood, a bigger house, or proximity to lifestyle amenities and perhaps family.
Wealth building: Because rentvestors save on mortgage repayments and invest the savings into one or more investment properties, they build wealth.
It’s “all care, no responsibility”: Rentvesting delivers the perks of being a tenant; the main one being the notion of “all care, no responsibility”. Unlike owning, any issues with a rental property are ultimately the landlord’s responsibility and maintenance costs comes out of their pocket, not the rentvestors.
Ability to go with the flow: Renting gives people the flexibility to live in a variety of places and property types, so they’re able to “go with the flow” a lot more than if they owned their own home. Given the high cost of selling and then re-buying property, this option is not always financially sensible for traditional investors.
Tax benefits: With an investment property, it’s possible to initially claim holding costs, plus depreciation costs each year. In addition, some of the initial costs, such as stamp duty, conveyancing and lending fees can also be claimed, depending on the situation.
Loss of full capital gains tax exemptions: There are negative tax consequences of rentvesting. If you own the house you live in, you are exempt from paying capital gains tax (CGT) if you sell it. Whereas if you sell your investment property, you are liable to pay tax on the profit you make.
Giving up on a dream: The “Australian dream” dictates that people buy a house and make it their own by adding personal touches. Rentvestors are still renting, so don’t have the same freedom and need the landlord’s permission to make substantial changes.
Less control: As a renter, the landlord has rights and control over the property, which can create uncertainty for tenants.
The “what will people think?” worry: Rentvesting goes against the entrenched norm in Australia of living in “your own” home, so rentvestors can expect peer pressure from family and friends who just don’t understand their decision to continue to rent.
So, is rentvesting the way to go?
Rentvesting works best when there’s a noticeable difference between what it costs to buy versus rent in the same area. Ultimately, it’s more suited to those on higher incomes, because earning more generally results in a higher borrowing power. But it’s also something a younger person can consider if they can’t afford to buy where they really want to live and are happy to take a road-less-travelled. But every investor is different and people should always get independent financial advice.
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The above information has been sourced from Realestate.com.au. To read the full article CLICK HERE.