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What is Rentvesting?

The rise of the “rentvesting” phenomenon has been growing over the past couple of years. It’s investing in real estate while still making monthly rental payments. The concept is quite popular among millennials trying to find their financial feet. 

But it makes up only 28% of owner-occupiers despite being the largest generation in the workforce. The traditional homeownership model has changed over the past decade. But, it’s not as easy as “get a job, get a house, have kids, live ever after.”

Rentvesting is the best way to get ahead financially in the 21st century. It allows you to build a sustainable passive income by operating as a business. This is without taking on any typical risks of being an investor. It’s a concept where you invest in the stock market and properties while still renting. It’s a great way to avoid paying a mortgage while building your fortune.

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Is rentvesting a good idea?

Rentvesting is all about ensuring your financial future while maintaining your current lifestyle. Rentvesting allows you to live where you choose rather than having to relocate to a location in your city. Relocate to a place where you can afford to buy property because renting is very inexpensive.

For many young Australians, the dream of entering the housing market seems out of reach. High house prices in Sydney and Melbourne make it difficult for new home buyers.

The housing market is going through a boom, and mortgage interest rates are at record lows. So, rentvesting is becoming a popular option for Australians. This is for those looking to get a foothold in the property market. Instead of using your deposit to buy a home, you use it as a deposit on an investment property. You then rent somewhere to live and collect the income from the investment property.

Financial stability

Invest in real estate without draining your bank account, additionally, without maxing out your credit cards and paying a ton of interest. It’s a great way to build a solid asset base while still using your money for the things you love. It lets you use both benefits of renting and homeownership.

The cash flow from your investment might cover the mortgage and even give you some extra money each week. If the rental market goes crazy, your investment property could increase in value in a few years.

Flexibility

It allows you to take advantage of lower property prices. It also gives you the flexibility to move if your circumstances change. For example, as you start a family. You could build up capital faster to buy in the area where you want to live. 

Yet, there are a few things you need to consider before rentvesting: 

Check your numbers. Do the sums and work out if you can afford the repayments on an investment property. While you rent somewhere, you’d like to live. It would help to consider loan interest, property management fees, repairs, and maintenance costs.

Location. While you can buy an investment property anywhere. It’s essential to consider a few logistics. For example, buying a property in the city when you live on the coast may increase traveling time. Also, it may increase costs for inspections and maintenance.

Rent affordability. People look at buying an investment property to get on the property ladder. But it can also be a way of buying into a better suburb than they could afford to buy their own home.

Investment loan. You will need to decide whether you want an investment loan or a standard home loan if you opt for an investment loan. You’ll be able to claim back tax deductions on interest and property expenses.

Your rental yield

For rentvesting to be profitable. The rental yield you receive must be higher than what you’re paying yourself. For example, if you’re renting a house for $500 a week and your investment property is only returning $550 a week in rental income. This arrangement might not deliver your expected returns.

Meanwhile, you’ll have acquired a more affordable investment home. This might increase in value as your renters pay down your mortgage, allowing you to build equity. This equity can be utilized as bank collateral to buy a property in your favorite neighborhood. It can be used to invest in anything else.

Consider the Auckland market as an illustration of how inexpensive leasing is compared to purchasing in some locations. Let’s say you bought a house in Auckland for $820,000, according to the Real Estate Institute of New Zealand. You’d be responsible for weekly mortgage payments of more than $1,000. According to New Zealand Tenancy Services data, you could rent two properties in Auckland’s affluent Viaduct neighborhood for that sum.

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Is Rentvesting a good idea?

Rentvesting VS Buying Owner- Occupied – A Case Study

The concept of rentvesting is simple. You buy an investment property to rent it out, and you continue to rent where you live yourself. This differs from buying an owner-occupied property, which you would live in yourself.

Purchasing Power

For example, if you’re a first-time homebuyer and consider buying a small apartment in Sydney’s inner-city suburbs that costs $700,000. It means you will have only saved $150,000 as a deposit. Your annual income is $80,000, and your borrowing capacity is only $450,000, well short of what you need to buy the home.

Or if you bought a unit in Sydney’s outer suburbs for $400,000 with your $150,000 deposit. But you rent out the apartment for $500 per week, and your borrowing capacity increases to $650,000. You can then buy an investment property in the area where you want to live and rent that instead.

Tax Implications

It is much easier to buy an investment property than an owner-occupied property. Also, it is cheaper to rent a house where you live and buy an investment property in a growth area. 

The case study is based on a single couple who make $70,000 per year. They have saved $100,000 as a deposit for their first property. They want to know if they should get an owner-occupied or investment loan.

We will assume that they can only afford to borrow $300,000 for their first home and keep it for eight years. Before selling it for $550,000, the median price of 3-bedroom houses in the area they want to live in. We will also assume that the interest rate will be 5% per annum.

It is often best to buy an investment property rather than an owner-occupied property. The best way to buy an investment property is to rent out your current home; after that, go and buy an investment property in a growth area.

How Do I Start Rentvesting?

Get your finances in order

It’s essential to ensure your finances before applying for finance. Ensure you have paid off any debts or credit cards and have at least 20% of the purchase price as a deposit or more. This is if you need to borrow more than 80% of the property’s value. An excellent way to do this is by setting up a separate bank account. It will help you put money away each week into this account. So you don’t notice it missing from your day-to-day performance.

Research

When you’re buying your first investment property, it’s essential to consider how it will perform in years to come. You want to choose a city that has strong long-term growth potential so you can make money off capital gains. No one wants their property value to fall. 

Determine the price point

Several factors will influence this, such as your financial position and location. Are you a first homebuyer? Or are you in financial distress and need to downsize? If you’re unsure where to start, speak with a trusted mortgage broker or financial planner. They can help you assess your finances and determine what kind of property you can afford. 

Once you’ve determined a rough price range for what you can afford, do some research on the market in an area that interests you. If possible, talk to some people who live there and ask them what it’s like.

Apply for a loan

Shop around to find the best deal and ensure that you get benefits from buying an investment property. This is rather than paying off your own home faster. Sometimes investors will add features like offset accounts to their loans. This is to earn interest on their money while their mortgage balance reduces.

Buy Your Property

It’s essential to make sure your investment will be profitable from the beginning. So you must speak to an expert mortgage broker who knows how to structure your loan for maximum tax efficiency. It’s also essential you talk with a buyer’s agent. This is because they can help you find the right and well-priced property. They have the experience and expertise you need to ensure your investment is profitable and reliable.

Find a tenant for your investment property

Once you own an investment property, finding tenants is vital to keeping costs down and maximizing your rental income. Property managers can help find tenants and manage the rental process. But this will come at a price, usually around 6% of the weekly rental amount plus GST per year.


Related Article: How To Select Your Ideal Market For Your Next Property Investment?


Rentvesting Pros and Cons

It’s an excellent concept that can help you grow your nest egg, build equity, and provide a more stable cash flow. However, with the popularity of rentvesting, many myths are out there. There are ups and downs with each. So it’s essential to weigh all your options before making substantial commitments.

Cash in buying a home or renting
Rentvest or Live In

Advantages of Rentvesting

Potential to purchase an investment property sooner

You live in a property that you can afford now, rather than buying your dream home. This means you may be able to get into the property market sooner. For example, if you live in a property worth $400,000 and have $100,000 saved for a deposit. You could buy an investment property worth $500,000.

Tax advantages

You can claim tax deductions on mortgage interest payments and other expenses incurred. If your property has long-term capital growth, it will also attract capital gains tax if sold at a profit.

Flexibility

Rentvesting allows you to move around. This is helpful if you’re unsure where you want to live long-term. Or it would help if you moved closer to family or work commitments without selling your home and incurring capital gains tax (CGT). Buying an investment property also gives you the freedom to live in a house that suits your lifestyle. 

Diversify your investments and spread the risk

Some investors prefer investing in areas with high yields. At the same time, others choose locations based on the quality of life they offer. Rentvesting allows you to invest in different suburbs. This is as you reap the benefits of diversification. This is especially important if you are looking to maximize your return on investment and cut risk.

Purchasing power

Most people don’t have unlimited funds for real estate, so they must prioritize. Choosing between a great investment property and a nice place to live is hard. But choosing both is impossible for one person. By selecting the best of each category, you can maximize your financial position.

Disadvantages of Rentvesting

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Projections over time

Rental costs

Since you’re spending money on two properties, it could impact how much you have available for other discretionary spending. You may need to budget for any maintenance or strata fees for your investment property. If you can’t find a tenant, you’ll need to cover your mortgage repayments yourself and incur extra costs. These costs include interest rate rises or property management fees.

Low capital growth

The property you buy may not increase in value as much as if you purchased it in the suburb you live in. This is because investment properties are more often in areas with lower prices. Thus, they are less likely to experience the same growth rate as expensive, inner-city suburbs.

Less security 

You don’t own the place where you live, so your landlord could ask you to leave at any time. Rent also tends to increase over time, whereas your mortgage repayments may be fixed or decrease if you have a variable rate loan.

Miss out access to FHOG

You may miss out on access to first homeowner grants and other government assistance forms. For example, there are government first home buyer grants available to owner-occupiers, and even paying your stamp duty is cheaper when buying a home to live in the long term.

Bottom Line

More and more people have found themselves unable to buy property in today’s overpriced real estate market. Rentvesting has given many individuals and families the ability to enter the real estate market. This is without paying mortgage payments.

It’s a pragmatic approach to achieving financial independence. This plan requires more effort over time than investing in stocks and real estate. But it can yield comparable results with a lower initial investment. 

Let’s look at an example situation to have a better idea of how to rent vesting works. Amara is a 30-year-old critical care nurse who works in one of Melbourne’s inner-city hospitals. Amara wants to stay close to her employment since she works shifts and enjoys being close to all the ‘fun’ with her pals. But she also recognizes the need of keeping one eye on her financial future. She isn’t quite ready to settle down, and the sort of house she wants in the inner-city location she desires is out of her financial range. As a result, she wants to do some math on a rent vesting approach that would be a better fit for her.

Amara makes $78,000 per year and pays $240 per week in rent in her shared house. Although she still embraces the luxuries of city living, she has been an excellent saver, putting up $75,000 over the years. Her parents are willing to provide $20,000 to help her get started on her property plans so she may put down a deposit of $95,000. Let’s have a look at her two possibilities…


You might also be interested in this article: Sealing the deal: Buyer’s Secrets You Need To Know When Dealing With Real Estate Agents.


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I am passionate about helping individuals create wealth through property investments. I am the co-founder, mentor and financial writer at WatuDaily, specialising in property investment, business advice and personal money matters. I was previously a financial adviser for over 15 years and it is on that high that I wish to share my knowledge and experiences and channel them towards a vision and purpose of helping others to realise and achieve their financial goals through my publications. As a financial adviser, I won a number of industry awards for the outstanding contribution I made to my clients and peers. I hold a Bachelor of Applied Finance degree and a Master of Commerce in Accounting and Finance degree. In my spare time, I enjoy travelling and staying active through playing sport.