Rentvesting is a bit of a buzzword at the moment as an increasing amount of Australians are choosing to purchase an investment property to get a foot in the real estate door. These first homebuyers then continue living in a rental property. Why? Is this a smart move or a poor one? We’ve created a list of pros and cons so you can weigh it up.
Pros of rentvesting:
-
You can live where you want rather than where you can afford
As anyone gearing up to purchase his or her first home will know, where you want to live and where you can afford to buy tends to be vastly different. You might have South Yarra taste on a Doreen budget. Rentvesting means your lifestyle doesn’t have to change, and you’re still able to invest in property and a foot in the door.
-
Get ahead financially
Buying in an affordable area means you can get into the property market sooner. If you’re waiting to buy in an inner suburb you’re looking at $1 million plus for Melbourne and Sydney. Saving for the deposit, let alone being able to meet those repayments, will take years- if you ever even get to that point. Getting into the market sooner holds you in good stead for the future.
-
There’s the potential for additional income
If you invest wisely, the incoming rent may be more than your outgoing mortgage repayments. Every cent counts and if you have that additional money coming in you’ve got the opportunity to save a nice nest egg to help when you want to buy your forever home.
-
Flexibility and freedom
When you rent, you can move around as you please. Whether that’s to a different suburb or a different country. If you aren’t sure where you want to settle long term, then rentvesting can take that issue out of the equation.
Cons of rentvesting:
-
It’s a hassle
Being both a landlord and a tenant presents it’s own set of issues. Finding a rental you love is hard and time consuming. Dealing with a tricky landlord can be draining and issues can take longer than they should to be sorted. Vice versa with being a landlord… you might get a dodgy tenant or end up spending more time than you’d like to managing the property.
-
Selling an investment property incurs Capital Gains Tax
Essentially this means you pay tax on the profit margin. In an owner-occupied house, CGT doesn’t apply. *
-
Whilst renting comes with some freedoms, it limits others
There are only so many changes you can make to a rental property. You’re missing out on the freedom to make a home how you want it.
-
Rent money is dead money
You’ve heard it time and time again… because it’s true. You’re throwing money down the toilet. Weigh up whether the lifestyle is worth it.
* Although CGT does apply to some investment properties, if you live in the property when you first buy it for any period of time, before you then rent it out, you can qualify for the six-year exemption rule. This means if you don’t own treat any other property as your main residence, you will be able to sell this property CGT free for up to six years.
As with any huge financial decision, the key is to get professional guidance before settling on anything. Individual financial situations will clearly have a huge impact over whether rentvesting is the right choice for you. Be educated on all the pros and cons, get advice from the right people and position yourself in the best way possible.
