Rentvesting: Balancing Lifestyle and Property Investment for Financial Success
Are you interested in advancing in the real estate market but find it challenging to buy a property in your desired location due to affordability? Rentvesting could be the solution you've been searching for to enter the property market.
Rising property prices have prompted many new investors to consider the trade-off between lifestyle and property ownership. Rentvesting has provided numerous Australians with the opportunity to expand their property portfolio without compromising their preferred way of life. It offers the best of both worlds.
But what exactly is rentvesting? How does it work? What are the advantages and disadvantages? Is it the right choice for you? Is it feasible to pay off a mortgage while renting simultaneously?
In this comprehensive guide to property rentvesting, we will address all these questions and more.
Understanding Rentvesting
Rentvesting entails purchasing an investment property in an affordable area, typically outside the city, while simultaneously renting a property in a location that suits your lifestyle.
In essence, rentvesting allows you to strike a balance between owning a reasonably priced property and living in your dream home, which you may not currently be able to afford.
For example, let's consider Mandy, who currently rents a house in inner city Sydney close to her workplace and friends. Although she desires to own her living space, she cannot afford a property where she is. Mandy conducted research to compare the costs of buying or renting her dream home in Sydney. The average price of a 3-bedroom house in inner city Sydney is approximately $1,750,000. If Mandy made a 20% deposit, her home loan would amount to at least $1,400,000 with a monthly mortgage payment of $5,902*
At present, Mandy pays $680 per week in rent, totaling $2,946 per month approximately half of the estimated mortgage payments. Therefore, for rentvesting, Mandy should be able to afford a mortgage of approximately $2,956 per month.
After conducting further research on the property market, Mandy found that Brisbane would be a suitable investment option. She discovered a beautiful townhouse on the outskirts of the city, priced at $780,000. With a 20% deposit, her home loan would be $624,000, resulting in a monthly mortgage payment of $2,630.*
By rentvesting, Mandy decides to invest in the property in Brisbane while continuing to rent in Sydney allowing her to remain close to her work and friends.
*It's essential to note that this calculation serves as a simple example, and various factors can influence individual scenarios. Nevertheless, it provides an idea of the potential benefits of rentvesting.
Now, let's examine the advantages and disadvantages of rentvesting.
Benefits of Rentvesting
Source: The Guardian
Freedom to live where you want: Rentvesting allows you to enjoy the lifestyle you desire while steadily progressing in the property market.
Entering the property market sooner: Instead of waiting until you can afford your dream home, rentvesting enables you to begin building your property portfolio earlier.
Tax benefits: Owning an investment property grants you the opportunity to claim tax deductions that are not available for owner-occupied properties.
Flexibility: Renting offers flexibility, allowing you to choose a home based on your circumstances. For instance, if you receive a promotion in another city, renting gives you the flexibility to relocate without the burden of selling a home.
Disadvantages of Rentvesting
Source: The New Daily
Renting your home: Renting your dream home means it is not your property, making it challenging to establish the same sense of belonging. Additionally, you may need permission from property managers or landlords for alterations or repairs.
Counter-intuitive: The idea of purchasing a property solely for renting, while paying someone else's mortgage for your rental property, may seem counter-intuitive.
Capital gains tax: Selling an investment property typically incurs capital gains tax on the profit made from the sale, unlike selling your primary residence.
Ineligibility for First Home Owners Grant: Rentvestors are unable to access the First Home Owners Grant since they do not occupy the purchased property.
Potential capital loss: Investments do not always guarantee an increase in value. If the property depreciates, selling it may result in a loss.
Factors to Consider Before Choosing Rentvesting
There are several other factors to be considered before finalising your decision.
Crunch your numbers: Rentvesting must make financial sense in your specific circumstances. Assess the potential loss of first-time buyer benefits, such as the First Home Owner Grant and stamp duty reductions, as well as the ability to save through tax deductions.
Rental income: Negative gearing properties, which operate at a loss, may not be ideal for first-time property investors due to high transaction and maintenance costs. Consider the long-term nature of the investment and ensure you can cover the gap between property costs and rental income.
Steps to successful rentvesting: If you've decided that rentvesting aligns with your goals:
Secure a deposit, aiming for 20% to avoid Lenders Mortgage Insurance.
Conduct thorough research to identify locations with potential growth, low vacancy rates, and good rental yields.
Seek expert advice, such as a buyer's agent, to assist in purchasing an investment property with growth potential.
Repeat the process by considering your next property goal, utilising the savings and equity from your first investment property to secure future properties or even your dream home.
Key Takeaways
Choosing the right investment strategy requires aligning it with your financial circumstances, lifestyle preferences, and future goals. There is no one-size-fits-all approach to property investment.
Rentvesting offers a viable option that balances lifestyle and property goals, allowing you to enter the property market sooner while fulfilling your social desires. However, it comes with advantages and disadvantages.
To make an informed decision, a solid understanding of the property market, associated costs, and effective financial management is crucial. At Sandcastle Finance, we specialise in guiding our clients through the property investment journey, from planning and financing, right through to the growth and expansion that comes with building real wealth through multiple property investments.
Reach out to us today to discover how we can help you get build real wealth a lot sooner. Call us on 1300 419 554 or book in on line.
