What is rentvesting? Purchasing an investment property while continuing to rent another property (to live in).
Why is it favoured? In the early-mid 2010s, it gained popularity due to tax incentives for investment properties.
Younger generations that are trying to get into the market are having a hard time – with low levels of income growth and unmatched increasing house prices, affordability is huge challenge.
It’s cheaper to rent a home in desired area, than owning one. Generally when people rentvest, they are renting a decent property in a suburb they want to live in (but can’t necessarily afford), whilst investing a property in a more affordable suburb.
Rising house prices aren’t going to slow down, which makes it harder especially for first home buyers. So rentvesting is a strategic way to get into the market and take advantage of the rising prices in the long-run. Owning a home, let alone maintaining & renovating, is very costly. But with an investment property, you can get tax deductions (during periods the property was tenanted or available for rent) on:
- Rental advertising costs
- Loan interest & bank fees
- Council rates
- Land tax
- Strata fees
- Repairs and maintenance
- Property depreciation
- Appliance depreciation
- Pest control
- Garden and maintenance
- Bookkeeping expenses
- Property manager or agent expenses
- Stationery, phone, internet, electricity costs related to running your investment property (business purposes essentially)
- Legal expenses
- Capital gains tax discount (after a year of buying your investment property)
A successful rentvesting strategy should be structured like this:
The rent collected and tax deductions covers the cost of holding the investment property.
Some rentvesters incur a surplus i.e. the rent collected covers the costs AND gives them extra cash to spend!
Why does it have to be in a affordable suburb? Selecting an investment property in an affordable suburb means that you can:
- Enter the market with a smaller deposit
- Get a smaller loan
- Incur less costs in interest
Rather than waiting years to save and find your first dream home, you would be entering the market and building your portfolio much sooner.
Continuing to rent a place as your home gives you far more flexibility than owning a home. You can move, upsize, downsize, travel and have plenty of options of properties to choose from.
When shopping for your investment property, the experience is very different to searching for your dream home. You get to hone into the numbers, and really critique the costs and returns. You’re not searching to make a comfortable home, you’re searching to make profit!
Rentvesting works well for those who want to build a profitable real estate portfolio. This means it takes, time, research and a lot of patience. Your mindset needs to be business orientated plus you’ll be becoming a landlord!
If you’ve been thinking of investment properties, get in touch. We can go over what you’d like to achieve and have a look at what your best options are.