Is Rentvesting a smart money choice

Australians have always had a dream of owning their own home. Some might call it an obsession. And whilst the dream is well and truly alive, the growth in the past five years of a new type of property buyer called the rentvestor, shows that some a willing to realise the dream in a novel way. So, is rentvesting a smart money choice?

Rentvesting is where a property buyer rents where they live and buys a property for investment elsewhere. This concept has grown in popularity in recent years especially in the major cities on the eastern seaboard of Australia where average property prices are just under the one million dollar mark.

Rentvesting can have the benefit of being able to rent the property you’d like to live in for less than what your mortgage payments would be if you were to take out a mortgage to buy the property. The savings you make by renting can then be put towards a deposit to buy a property that someone will rent from you. Invariably, the rent largely goes towards the mortgage payments on the investment property.

Therefore, real upside from rentvesting comes through the capital growth you achieve over time. Even when taking into account the recent property market declines we have seen recently, over the past 10 years, property prices have increased on average more than 5% per annum.

So not only do rentvestors get to live in their dream home year after year, they also benefit from the capital growth of owing an investment property. Even if your investment property may not have grown in value at the same rate as your dream home you could have bought and lived in, you’re now well placed to buy your dream home. So what are the pros and cons of rentvesting?

Pros

• Ability to enter the property market sooner. Rentvesting allows you to break into the property market sooner, as opposed to waiting several years until you are able to afford your dream home
  which invariably will cost more.
• Live in the house of your dreams now. If rental prices allow, you can live in your dream home now and not have to compromise on location or features, and you don’t have to worry about taking on the long-term commitment of a big mortgage.
• Build wealth. Rentvesting allows you to start building your investment property portfolio, which can be used to generate wealth for you and your family in the future.
• Flexibility. When you’re renting, you can easily upgrade or downgrade to a different home if your circumstances change, for example if you lose your job or get a high-paying promotion, with no stamp duty expenses or legal costs to worry about.
• Potential Tax benefits. There are potential tax benefits that can be achieved by buying an investment property. For example, you can claim interest payments on your investment property loan as a tax deduction. But make sure you seek professional advice first.
• Choose where to invest. Where you want to live and the best place to buy an investment property usually aren’t the same. Rentvesting allows you to be ruthless when it comes to choosing an investment.

Cons

• Buying an investment first. Buying an investment property before purchasing your own home can seem counter-intuitive to many people.
• Rent money is dead money. The old adage that “rent money is dead money” may be a deterrent for some people considering this approach.
• You don’t own your home. As much as you may love your rental property, you don’t own it. This can be especially difficult if you form an emotional connection to a house but then the landlord wants you to move out.
• You can’t make it your own. Although a rental property might be vastly improved by a renovation project or simply a fresh coat of paint, remember that it’s not yours to tinker with.

Taking all the pros and cons into consideration, should you rent or buy? Or become a rentvestor? Unfortunately, there’s no stock-standard answer to this question. Instead, the right approach for you will depend on your individual circumstances.

Before you choose to buy a home or rent and invest, make sure the strategy you choose does not place any financial stress on you. To help ensure that doesn’t happen, we recommend doing what around 60% of Australians do when buying a property – seek the advice of a mortgage broker. And if you decide rentvesting is for you, remember Deposit Power can help with the deposit.