As housing prices continue to soar in many parts of Australia, many would-be homebuyers are priced out of their dream suburbs. Despite this daunting reality, the aspiration to invest in real estate and secure financial stability has remained strong.
Enter ‘rentvesting’, a creative solution to this modern predicament.
This strategy, blending ‘renting’ and ‘investing’, allows potential property investors to live in their preferred locations affordably while simultaneously climbing the property ladder and building wealth through property investment elsewhere.
For those feeling disheartened by escalating property prices yet undeterred in their investment ambitions, rentvesting could be the innovative approach you’ve been seeking.
In this blog, we delve into the intricacies of rentvesting, exploring its potential as a viable pathway to property investment in the current Australian real estate landscape.
What is Rentvesting?
Originating as a response to skyrocketing property prices in metropolitan hotspots like Sydney and Melbourne, rentvesting has become a popular investment strategy among Australians, particularly first-time homeowners.
This strategy involves renting a property in an area where you prefer to live while purchasing an investment property in a more affordable location. The primary intention of rentvesting is to enable individuals to maintain their current lifestyle and simultaneously take advantage of the Australian property market’s growth.
By doing so, they enjoy the financial leverage of property investment without compromising their lifestyle preferences.
This innovative approach has gained traction as a viable alternative for many Australians seeking ways to enter the property market despite the daunting price tags in their preferred locations.
But is it the right solution for you?
Let’s consider the benefits and potential drawbacks of rentvesting.
Benefits of Rentvesting
Here are three ways you could benefit from using a rentvesting strategy.
Affordability and Flexibility
Buy an investment property in a more affordable location and rent in your preferred area. You can maintain your desired lifestyle without taking on the financial burden of purchasing there.
Investment Property Growth
As a rentvestor, you have the opportunity to capitalise on investment growth. With the income generated from the rental property, renting in your preferred suburb may become more manageable. Your investment property’s rental income and potential capital growth can contribute to your overall wealth, allowing you to save towards a future home or grow your property portfolio.
Rentvesting can also offer significant tax benefits. If you own and live in a property, you generally aren’t entitled to the same tax deductions available to investment properties.
However, with rentvesting, you can claim tax deductions on your investment property for interest payments, property management fees, and maintenance costs.
In addition to these tax benefits, the rental income from your investment property may also help cover your own rental expenses, providing an added financial advantage.
So, while you’re enjoying life in your rented residence, your investment property works in the background, making your financial journey smoother and more rewarding.
You should keep in mind, though, that along with the tax advantages, you also have new tax obligations. For example, you’ll have to pay tax on the rental income you generate. And if you decide to sell the property, you’ll likely trigger capital gains tax (CGT).
Challenges and Risks
Now let’s consider the three possible challenges and risks you may encounter if you rentvest.
Rental Income Dependency
As a rentvestor, you largely depend on rental income to cover the costs of your investment property. However, there might be times when your property remains vacant or your tenants need help with financial difficulties.
This could affect your ability to meet mortgage repayments and other property-related expenses.
However, you can mitigate this risk by ensuring you have a financial buffer to cover unexpected costs and vacancies.
Property Market Volatility
The property market can be unpredictable, and factors like interest rate fluctuations, economic changes, or a potential oversupply can impact the value of your investment property.
But while you can’t control these factors, you can take steps to protect yourself. Make sure you research the property market carefully before investing, and consider more affordable areas with long-term growth potential.
Additionally, focus on selecting properties with strong rental demand to minimise the risk of extended vacancies.
Property Investment Management Responsibilities
You must ensure your property is well maintained and up-to-date with legal and regulatory requirements. You may also have to deal with tenant disputes or repair issues, which could be time-consuming and stressful.
One option to alleviate this burden is to hire a professional property manager. However, factoring in their fees while budgeting for your investment is important. In the end, you must weigh the trade-offs between handling property management tasks yourself and outsourcing them to ensure the overall success of your rentvesting strategy.
Tips for Successful Rentvesting
If, after considering both the advantages and possible risks of this strategy, you’ve decided to go ahead with rentvesting, here are a few tips you should implement to maximise the success of your investment.
Select the Right Property
When choosing a property for rentvesting, you should aim for one with strong growth potential and is located in an area with high rental demand.
So, as with any investment venture, research suburbs, local amenities, and infrastructure developments to identify markets on the rise.
You should invest in properties with features that appeal to a broad range of tenants, such as public transportation access, local schools, and shops. Remember, you’re catering to both your investment objectives and the preferences of your target tenant market.
Manage Finances and Budgeting
To succeed in rentvesting, you must effectively manage your finances and budget.
Start by evaluating your financial situation to determine if you can afford to purchase a property and rent another. You must maintain a clear and detailed plan for covering the ongoing costs of property ownership, such as mortgage repayments, maintenance, insurance, and taxes, while also paying your rent.
You should also consider adopting strategies like setting up a separate account for rental income, tracking your expenses, and creating a financial buffer for unexpected costs.
And be prepared to periodically reevaluate your budget and make adjustments as necessary to ensure your rentvesting strategy remains sustainable.
Work with Professionals
It’s vital that you consider engaging with experienced and knowledgeable real estate agents, mortgage brokers, and financial advisors to help you navigate the complexities of property investment and rental markets.
They can guide property selection, financing options, tax implications, and rental yield projections, ensuring that your rentvesting strategy aligns with your financial goals and risk appetite.
Having trustworthy professionals on your side can help mitigate potential risks and maximise the return on your investment, so be diligent in your research and selection process for the people who will support your rentvesting journey.
- Rentvesting is a growing trend, particularly among younger buyers, that combines renting a lifestyle-suitable property with owning an investment property.
- This strategy enables entry into the property market without compromising on location or lifestyle preferences.
- Successful rentvesting involves careful research to identify affordable, growth-potential properties, good negotiation skills, and effective financial management.
Remember, while rentvesting can be attractive for many, you must weigh the pros and cons before deciding if it’s the right strategy for your financial situation and goals.
Consider seeking professional financial advice to help you navigate this unique approach to property investment.