28 May 2024

What is Rentvesting And Is It Worth It? Let’s Explore The Pros And Cons

In today's real estate market, soaring home prices make homeownership challenging. One popular strategy to overcome this is "rentvesting."

This approach allows people to rent their desired living space while investing in a separate, more affordable property.

This way, they can enjoy the lifestyle they want while building wealth through owning a property.

Is this something you should consider? Let’s explore the pros and cons to help you decide.

Understanding Rentvesting

Rentvesting involves buying a property in a more affordable location to rent out while continuing to rent your own primary residence.

This allows you to benefit from potential capital growth and rental income from the investment property while enjoying the flexibility of renting your personal living space.

The rise of rentvesting is driven by the widening gap between home prices and affordability, especially in major metropolitan areas.

Many aspiring homeowners find themselves priced out of the market as property values in desirable urban centres have skyrocketed.

Pros of Rentvesting

Increased Affordability

Rentvesting allows individuals to enter the property market by acquiring an investment property in a more affordable area.

For example, instead of buying a home in Brisbane where median house prices are over $750,000, one might purchase an investment property in a regional area like Ipswich or Logan, where prices are significantly lower.

Flexibility and Mobility

Renting your primary residence provides greater flexibility to move and adapt to changing life circumstances without the constraints of a long-term mortgage.

This is particularly beneficial for young professionals who might need to relocate for career opportunities.

Diversified Risk

By separating the investment property from the primary residence, rentvesters can diversify their financial risk, reducing the impact of potential market fluctuations.

For instance, if the property market in your investment area slows down, your primary residence's market is unaffected.

Tax Benefits

Rentvesting can offer tax advantages, such as the ability to claim depreciation and interest expenses on the investment property, which can help offset the overall costs of ownership.

In Australia, negative gearing can further enhance these benefits, allowing you to deduct rental property expenses from your taxable income.

Potential for Capital Growth

As the investment property appreciates in value over time, rentvesters can potentially benefit from capital gains, contributing to their long-term wealth.

Investing in growth suburbs where infrastructure development is underway can yield substantial capital growth.

Passive Income

The rental income generated from the investment property can be used to cover the cost of personal living expenses, effectively creating a passive income stream.

For example, if you buy an investment property in Ipswich and earn a rental income of $20,000 per year, this income can help pay your rent in a city like Brisbane.

Cons of Rentvesting

Higher Interest Rates on Investor Loans

Investor home loans typically come with higher interest rates compared to owner-occupier mortgages, which can impact the overall financial viability of the investment.

For instance, an investor loan might have an interest rate of 6.5% compared to 5.0% for an owner-occupier loan.

Lack of Eligibility for Grants and Incentives

Rentvesters may not be eligible for first-time homebuyer grants or other initiatives designed to support owner-occupiers.

For example, the First Home Owner Grant (FHOG) in Australia typically applies to those who intend to live in the property.

Unreliable Tenants

Using your rental income effectively is essential for rentvesting to work, but this means you are dependent on tenants for your cash flow.

Tenants might turn out to be unreliable and miss rental payments, or you could face extended periods without a tenant.

Before pursuing rentvesting, ensure that the area you’re buying into has a relatively stable rental market, though that’s still no guarantee.

It's also worth seeking the help of a professional property manager to mitigate these risks. A property manager can screen potential tenants, handle lease agreements, and manage property maintenance, increasing the likelihood of a smooth rental experience.

Landlord Responsibilities

As a landlord, the rentvester is responsible for property maintenance, rates, fees, and other expenses associated with the investment property, which can eat into the bottom line.

Capital Gains Tax

When the investment property is eventually sold, the rentvester may be subject to capital gains tax on any profits. This can significantly reduce the net profit from the sale.

Is Rentvesting Right for You?

Determining whether rentvesting is the right strategy for you requires a careful evaluation of your financial situation, lifestyle preferences, and long-term goals.

It's crucial to weigh the potential benefits against the drawbacks and seek professional guidance from financial advisors and mortgage brokers to ensure the decision aligns

At Aurora Realty, we understand the complexities of rentvesting and are here to help you navigate this strategy with confidence.

Our experienced team can assist with tenant screening, lease agreements, and property maintenance, ensuring a smooth and successful rentvesting experience.