A guide to rentvesting

Rentvesting is becoming an increasingly popular strategy among Australians, particularly those looking to enter the property market in a financially savvy way.

What is rentvesting?

Rentvesting is an investment strategy in which you rent a property in an area where you wish to live but cannot afford to buy, while owning an investment property in a more affordable market.

This approach allows you to build wealth through property investment without compromising on your lifestyle.

Why is rentvesting gaining popularity in Australia?

The rising property prices across many major Australian cities have made it increasingly difficult to break into the market. Rentvesting offers a solution by helping you get a foothold on the property ladder while still enjoying the benefits of a city lifestyle, including being close to work, transportation, dining, and entertainment options.

Rentvesting vs traditional homeownership

Traditional homeownership involves buying a property to live in, often viewed as a rite of passage for many Australians. Owner-occupiers generally consider factors such as a property’s proximity to work, schools, and shops, as well as their lifestyle preferences when shortlisting.

In contrast, rentvesting separates the investment and living aspects of property ownership. It focuses on purchasing an investment property based on its potential for appreciation and rental yield, rather than personal living requirements.

Advantages of rentvesting

• Financial flexibility: Rentvesting allows investors to enter the property market with a potentially lower financial outlay, especially if the investment property is in a more affordable market.
• Lifestyle choices: Individuals can choose to live in areas that suit their lifestyle without the financial burden of owning a property there.
• Investment opportunities: By not being tied to living in the investment property, investors can focus on properties with higher rental yields or better capital growth prospects, regardless of the location.
• Potential for capital growth and rental income: Choosing the right investment property can lead to capital appreciation and steady rental income, contributing to long-term wealth.

Potential tax benefits of rentvesting

Rentvesting can offer several tax advantages too, primarily through deductions related to the investment property. These could include:

• Interest on the investment loan: The interest paid on a loan for an investment property is generally tax-deductible.
• Depreciation: Investors can claim depreciation on the building's structure and the fixtures and fittings within the property.
• Maintenance and management costs: Expenses incurred in maintaining and managing the property, including property management fees, are usually deductible.

It's crucial to consult with a tax professional to understand the specific benefits applicable to your circumstances.

Disadvantages of rentvesting

While rentvesting has its perks, there are also downsides to consider. These include:

• Lack of stability: Renting can be less stable than homeownership, with the potential for rent increases or the need to move if the lease is not renewed.
• Missed benefits of homeownership: Rentvestors may miss out on the emotional and financial benefits of living in a home they own, including the freedom to personalise their living space.
• Investment risks: Like any investment, there's a risk that the property could decrease in value, or rental income could be lower than expected.

What to consider before rentvesting

Before diving into rentvesting, it's important to:

• Evaluate your financial situation: Ensure you have the financial stability to manage an investment property and rent payments simultaneously
• Understand the market: Research potential investment areas for growth prospects and rental yield
• Consider your long-term goals: Align your rentvesting strategy with your broader financial and lifestyle objectives

How to minimise risk when rentvesting

To reduce the risks associated with rentvesting, make sure you:

• Get professional advice: Consult with mortgage brokers, tax professionals, and expert buyer’s agents to make an informed decision
• Choose the right property: Look for properties in areas with high growth potential, strong rental demand, and low vacancy rates.
• Get your finances in order: Ensure you have a solid financial foundation, including an emergency fund to cover unexpected expenses.

Looking to buy a high-quality investment property? Auswide Buyer’s Agency can help. To discuss your options, book a free consultation with Ashish Malhotra.