What is rentvesting and how does it work?
Is rentvesting worth it for you? Buying property can be hard, especially if you’re a first-time home buyer and can’t afford to buy where you’d actually like to live.
Should you keep saving and delay home ownership until you have more of a nest egg? Not necessarily, say the experts – instead, you might want to consider an increasingly popular strategy known as rentvesting. Remember to always do your own research and get expert advice when you need it. The explanations and information below are a guide only, to help you find out a little more about the subject.
What is rentvesting?
Rentvesting is a home ownership strategy that involves renting where you want to live and investing where you can afford to buy. It’s not a new idea, but in recent years it’s become more popular, with research showing that one third of first home-buyers in Australia are rentvesters.
After all, if you’re keen to buy but just can’t afford the house prices in your desired area, you may not have to keep scrimping, saving and hoping prices will drop. You can simply buy in a lower-value location – following careful research and ensuring you cover yourself by getting good financial advice and the right insurance, too.
Who would rentvesting suit?
Great question. Rentvesting can give you options and not require you to upend your life too much, it’s a strategy that appeals to a range of people.
For example, you may be a first-time home buyer who’s struggling to save a big deposit. You could be a young inner-city professional needing to live near your workplace. Or maybe you’re raising a young family and have ties to a local community you can’t afford to buy in, but you want to stay there.
As a rentvester, the idea is to pay rent in your desired suburb – and buy a reasonably-priced property in an outer suburb or regional area. If you’re lucky, you’ll get a long-term tenant to live in your investment property and use the rental income to pay it off.
Pros and cons to rentvesting
Like any investment strategy, there are benefits and drawbacks to consider.
Pros to rentvesting
- You don’t have to wait to buy property: If you want to buy now, rather than in five years when home prices may have risen along with interest rates, rentvesting could be a good solution to help you potentially start to building wealth through real estate.
- It gives you a lot more flexibility: Maybe you’re keen to live by the beach or have a job that requires you to travel. Rentvesting might enable you to maintain your lifestyle – but still get onto the property ladder.
- You can save for your dream home: If your investment property earns you a profit, you could use that income towards paying your rent, or saving for a dream home. At the same time, equity will be building on your investment.
- There may be financial benefits: As a property investor, you may be eligble for a range of tax benefits (chat to your accountant to get more info about your options).
Cons to rentvesting
- You’ll still be paying rent yourself: Yep, it’s bittersweet to know that your hard-earned cash is going towards paying off someone else’s mortgage, rather than the property you’ve purchased.
- You’ll need to save for a deposit: As a rule of thumb, you need a 20% deposit – but some lenders will let you borrow up to 95% of the property price. Just be aware that if you have a deposit of less than 20%, you may need Lender’s Mortgage Insurance (LMI), which can be costly.
- There may be a shortfall you’ll have to cover: If the rent being paid on your investment property doesn’t fully cover the mortgage, you may have to top up those payments out of your own income. Plus, strata fees, insurance, council rates and maintenance are all your costs to bear on an investment property, and you’ll need to budget for all of it.
- There may be more costs than you expected You may have quiet periods where you can’t lock in a tenant – but the mortgage payments and other costs on your investment property will still need to be paid.
What to consider before rentvesting
Firstly, you want to make sure you can afford to do it.
Buying an investment property comes with a range of ongoing costs so you should never rely on rental income, just in case you have trouble finding or keeping tenants. Strata fees, maintenance, paying the mortgage – all is your responsibility, on top of paying rent where you live! So, budgeting for all contingencies, being aware of any tax obligations and making sure you can afford to invest and still meet your daily expenses is key.
Doing a bit of legwork to ensure that you’re investing in a high-growth area where there is demand for rental properties also makes sense. Talk to experts that might be able to offer some insight into what it takes to research potential property hot spots, and what you need to look for before you invest.
Is rentvesting right for you?
Ultimately, deciding to rentvest has to come down to your personal circumstances, financial position and the type of lifestyle you want to live.
Doing your research, working out a budget and seeking advice from a financial planner may all be worthwhile in helping you determine whether it’s the right way for you to get onto the property ladder. Good luck!
If you’re looking into property investment, it’s important to have all your financial ducks in a row – including the right insurances in place. Home Insurance is something to consider to protect the house or apartment that keeps you safe or that you have invested in – Real’s home and contents insurance covers anything from broken windows to bushfires. Whether you are looking to cover your house, its contents or your investment property, we’ve got great value options to suit your needs.
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18 Mar 2021