Rentvesting is a popular strategy in Australia for investors and home buyers looking to get into the property market.
As property values have risen in recent years, affordability has significantly decreased thus an increasing amount of people can no longer afford to buy where they want or need to live. – This is where Rentvesting can become an option.
Rentvesting is a property purchasing strategy, where you rent a property to live in that fits your lifestyle, whilst purchasing an investment property that's fits your budget, usually in a different location at a lower price.
It’s a simple sounding strategy, however putting into practice is not always a straight forward process.
To determine if Rentvesting is for you, you’ll need to compare the purchase prices and rental returns of your preferred location and then find alternative markets that will allow to afford the rent and the potential mortgage payments if you purchase in that market segment.
This strategy allows people to get a head in the property market and purchase multiple property’s often in different locations that are more affordable, offer better returns on investment and provide diversity across a portfolio rather than having all your eggs in a single property basket.
Buying property with a lower value, also results in potentially smaller more affordable mortgages, which will allow the investor to pay it back sooner, this improves loan serviceability, builds equity, bringing down the timeframe for the purchase of a 2nd or third property.
With Rentvesting it maybe beneficial for the investor to purchase property in a company or other suitable structure which may help reduce tax liability on the rental income to increase property cash flow, speaking to the appropriate advisor will help you determine which is the best way forward in your personal circumstance.
There are a few draw backs to this method, in that the capital gains will not be tax free on sale, like a principle place of residence would be. This same issue arises if you purchase in a company, other non personal name structure, land tax maybe come an additional cost over time.
Other issues could be, renting offers no permanence of residence if your landlord decides to sell or wants his property back, the rent you pay is not tax deductable or going towards paying off any of your assets.
Joining the property market as an investor means you miss out on the First Homeowners Grant, and other subsidies which may help you with a principle place of residence purchase.