‘Rentvesting’ has become a popular strategy for buyers desperate to secure their foothold in the market, whilst retaining lifestyle flexibility to live and work in an area that may have been unaffordable to purchase within.
Buying and living in your own home is becoming an increasingly lofty goal for first home buyers in Australia. This is especially hard for first-time buyers seeking a detached dwelling in a location reasonably close to the CBD.
Is rentvesting still a viable solution for first time home seekers, with an inflated rental market in high demand?
What is rentvesting?
Rentvesting is an approach to investing in the property market, whereby you purchase an affordable investment property, whilst renting (or staying at home) the type of property you want to live in, that you can’t yet afford to buy.
The goal here is to make a savvy investment, by purchasing a property that projects positive capital growth to advance your wealth to eventually buy the type of property that is desirable for your lifestyle preferences. Along the way you could capitalise on potential taxation benefits, whilst using your rental income to assist with paying down the principal debt and home loan interest.
This is a way that young Australians can begin to climb the property ladder and also live in a preferred location, usually within close proximity to work and social networks. It’s an option whereby you might have more disposable income to fund your lifestyle, whilst living in a low maintenance rental property.
How could rentvesting go wrong?
First and foremost, capital growth isn’t a sure thing and certainly isn’t equal amongst all property types and locations. Rentvesting assumes positive capital growth will occur, enabling you to eventually cash in and upsize to the type of home you actually want to live in.
Unfortunately, markets aren’t always predictable, and trend curves can quickly change for the worse. Cheaper properties are cheaper for a reason, they typically attract less buyers and are slower capital growth opportunities, if you don’t pick the right property. In some more volatile markets, you could even risk a capital loss (selling for lower than the price you have paid for the property).
Investing into property to jump on a potential capital gain is all well and good in theory, but what if the price tier you ultimately want to buy in outpaces the growth of your investment property?
You could misuse your hard earning savings, especially considering purchase costs such as Stamp Duty, and selling costs such as real estate agent commissions.
You should also be wary of a potential capital gains tax on an investment sale, or unforeseen operating costs and tenancy issues.
It could be a better option to bide time and continue to grow your savings for a more attractive property that projects higher growth opportunities and less risk.
Ways to successfully rentvest?
It all begins with the type of property to plan to invest in. It is no secret that Australia has a housing supply issue, and with migration propping up the economy, that might not change anytime soon.
As we know, not all property is equal, a small inner-city apartment is unlikely to increase in value in the same way a suburban detached dwelling might. Buyers love new property, once completed they’re considered safer bets from a maintenance perspective and are usually more aesthetically pleasing.
You might find that buying or building a new home is a higher growth opportunity than an older established property of similar characteristics. Yes, building or waiting for an off-the-plan development can be a drawn-out process with additional interest payable. Builders can also be viewed as risky propositions considering the economic issues they’ve faced over recent years. However, the short-term pain of waiting for a trusted builder or developer, might be worth the potential capital growth opportunity and rental demand that a new property would receive.
What assistance can I access as a First Home Buyer?
Most First Home Buyer incentives are for owner-occupied purchases only. The First Home Guarantee Scheme offered by the Federal Government wouldn’t apply for an investment purpose. Some states offer First Home Buyer incentives such as cash grants and stamp duty waivers, but again for owner-occupied buyers only.
In our home state of South Australia, these incentives generally won’t apply to an investment purchase, but you could retain these benefits for a future owner-occupied purchase, if you never occupied the investment property itself.
Start your journey into property by simply chatting with a Bernie Lewis Home Loans Finance Broker. We can coordinate with qualified accountants and financial planners to set you on the right path, whether that is rentvesting or another strategy suitable to your individual circumstances.
The information provided is general advice only. It has been prepared without taking into account any of your individual objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs.
