Owning a home was once a cornerstone of the Great Australian Dream. With rising property prices, especially in Melbourne and Sydney, that dream is starting to take a different shape. It’s called ‘rentvesting’.
In general terms, ‘rentvesting’ refers to when a person or family decides to rent where they want to live but still buy property elsewhere as an investment. For many, it’s an opportunity to break into the property market sooner than might otherwise have been possible.
The growth in this approach to residential property was highlighted in a recent survey from Mortgage Choice,1 which revealed that in 2016, more than a third of first-home buyers in Australia were buying property not to live in, and therefore were more likely to be rentvesting. This was up from 20 per cent two years ago.
If you are weighing up whether you should jump on the rentvesting bandwagon, here are the five top tips to consider:
In making the decision, consider what you want to achieve from the investment property at the outset
Know what you want
Many people live in the home they have chosen because that’s the limit of the mortgage they can afford to pay. As a rentvestor, you might be better off spending your money on a property in a growing area that is more likely to build your wealth faster than the area you’ve identified as ideal for your own lifestyle.
In making the decision, consider what you want to achieve from the investment property at the outset. Your financial objectives will not only influence what kind of property you look for and where, but will also affect your overall budget and your financial structure.
Importance of financial flexibility
Mortgage repayments can be one of the biggest financial strains on a household. While the balance can be slowly paid down over many years, the first few years can be hard.
Having the flexibility to adjust budgets depending on your circumstances is an added bonus when renting. If your financial circumstances change, you have the ability to move down (or up) to a rental property that’s more suitable. A promotion at work, for instance, may enable you to upgrade to rent in a better neighbourhood. Or, if you fancy going on a trip of a lifetime abroad, you could downgrade to a small space, which would allow you to save more.
Considering starting a family? Renting and investing elsewhere could be a good option. It’s not as permanent as buying and offers the option of trading up for a larger space or relocating for the right school.
Realise the full responsibilities
As a rentvestor, you will still be responsible for hidden expenses that might appear after you buy. Things to look into thoroughly include the quality of the roof, substantial cracks, pipes, drainage issues, roof damage, floor damage and asbestos, so you will need to do meticulous research.
You should also consider all the financial responsibilities associated with owning a property. Make sure you have total visibility of the potential expenses, such as the cost of a managing agent as well as strata bills, insurance and water. In addition, you will have rent to pay for the house you choose to live in.
Only Bring Your ‘Investment Eyes’
When working out whether to buy to live or buy to rent elsewhere, it’s a good idea to get an understanding of the likely costs and benefits of both, as well as the potential.
Higher-priced property can often mean lower rental yields as a percentage. On the other hand, lower-cost properties can generate a higher rental yield comparatively so you might be better off investing in a cheaper investment property with better rental yields.
It’s also worth getting a full picture of the potential of the area you are buying into. How are the schools and the local restaurants faring? What other amenities does the local area have on offer, and what’s on the drawing board over the coming decades, such as upgrades to infrastructure.
And, it’s a good idea to check with the local Neighbourhood Watch or police to get an insight into the relative safety of the area… nobody wants to live in a property in a high crime zone.
Understand the Tax Structure
While interest repayments from an investment property are fully tax deductible, there are other great savings you can make at tax time as well, including depreciation and negative gearing, which can help facilitate paying down the loan.
By using the rent coming in from your investment, plus regular savings like these, the loan could be paid down much more quickly than if you bought and lived in the house straight away. However, caution should be exercised because tax concessions can be altered with a change in government policy and can’t be relied upon.
It’s important to consider your individual circumstances before deciding which option is right for you. There’s no stock-standard answer to whether you should or shouldn’t rentvest, but before you choose to rent and invest, make sure you explore all eventualities.
Will Christie is a partner at Affinity Partners. He is a qualified financial planner and a practicing accounting and taxation advisor.
Trevor Robertson is head of residential products and third party relationships at BOQ Specialist.
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The information contained in this article (“Information”) is general in nature and has been provided in good faith, without taking into account your personal circumstances. While all reasonable care has been taken to ensure that the information is accurate and opinions fair and reasonable, no warranties in this regard are provided. We recommend that you obtain independent financial and tax advice before making any decisions.