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Rentvesting: an alternate way to climb the property ladder


It used to be that the great Australian dream was all about owning your own home on a quarter-acre block. However, soaring property prices ­­– particularly in Sydney, Melbourne and Brisbane – have locked a lot of would-be buyers out of the market.

You don't have to be the owner-occupier in the first home that you buy. In fact, not doing so might help you achieve the dream of home ownership more quickly than you thought possible.

What is rentvesting?

Rentvesting is a realistic alternative for first-time buyers and budding property investors. It means opting to buy or build an investment property in a more affordable suburb and using it as a rental property to help make mortgage repayments. You'll become a renter in an area that more closely fits your lifestyle, such as an inner-city suburb where real estate prices were too high for you to purchase.

Why consider rentvesting?

There are many benefits of rentvesting. Rentvesting could mean breaking into the property market sooner than if you bought-to-live, plus first home buyers may be able to access government grants.

Getting on the property ladder sooner opens up the potential of building a property portfolio, or buying your dream home down the track. ­

"Rent money is dead money" is a common phrase used by real estate agents to sell the pros of buying a home. That's not the case with rentvesting. Rentvesting means you're thinking smarter by paying home loan repayments while opening your investment opportunities without sacrificing your lifestyle.

As a rentvestor, you can rent a property that is out of your buying reach in a location that suits your current lifestyle. Even though you're paying rent to live, you still have a foothold on the property ladder through owning an investment property.

There's also the potential for additional tax benefits. You may be able to claim interest payments on this investment property as a tax deduction, providing they are higher than the rental income you receive from your tenants, and as long as the property is rented or available to rent. There is also the possibility to tax deduct losses like repairs, renovations and depreciating property value if you're negative gearing. Similarly, as a renter, you won't be incurring any maintenance costs where you're renting.

What you need to know

  • As a rentvestor, you are the owner and landlord. Sure, your tenant will most likely cover the majority of your mortgage, which is excellent. But as their landlord, you are also responsible for additional costs including repairs, council rates, landlord insurance and body corporate fees. Many of these are tax-deductible and worth discussing with your accountant.
  • As a result, you'll need to make sure you have a big enough cash flow buffer in the bank to cover both the expected and unexpected bills.
  • Think about who is going to manage the property. If that's not you, then hiring a property manager will likely incur further costs.
  • Like all things in life, it pays to do your research and come up with an investment strategy. When choosing where to buy, look at things like vacancy rates ­­– how likely are you to get a tenant in the home you're interested in buying? – and rental yield – the income generated by your property annually as a percentage of its value, minus costs.
  • You'll need to get clued up about rental leases (your own and that of your tenant), so you understand the impact of tenant notice periods.
  • Many rentvestors eventually sell their investment property to help purchase their live-in home. Keep in mind that when you do, you might be liable for capital gains tax.

You can read more about capital gains here.

Seek good advice

Director of mortgage management business FinancePath Chris Collard says it's vitally important to seek out financial advice if considering the rentvesting route.

"I recommend finding someone - like a mortgage broker - skilled enough to ask you the right questions because property investment isn't always right for everyone. Anyone can use an online calculator and find out what their borrowing power is. The question is, how much can you afford while maintaining your lifestyle without added stress and sleepless nights?"

Cons of rentvesting

  • You miss out on the first home buyer stamp duty exemption. You only qualify for this exemption if you plan on living in your first property for at least 12 months.
  • Capital Gains Tax (CGT) is unavoidable. You'll be taxed on any profit you make when you eventually sell your investment. CGT isn't a rentvester exclusive tax – anyone who sells an investment or asset pays this. We recommend talking to your mortgage broker who can explain CGT in more detail.
  • As a renter, if your landlord wants you out, you might over have 30-90 days to find a new home. As the rental market fluctuates, it might be hard to find somewhere similar to live within the same budget.

Choose a reputable third-party builder

By choosing Metricon, you have more than 40 years of experience behind you and a Lifetime Structural Guarantee* so

you can be confident you're investing in quality. You also have the

opportunity to walk through one of our display homes before making any

investment decisions.

First home buyers could consider HomeSolution by Metricon's home, land and finance packages which are a popular choice for rentvesting.

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