What is rentvesting?
Rentvesting is an investment strategy where you buy an investment property and rent it out, while living somewhere else as a tenant. This approach is particularly popular among first home buyers who can’t afford to purchase in their preferred location.
With rentvesting, you typically buy in more affordable suburbs or regional areas and rent these properties out. Meanwhile, you rent a home in your desired location, allowing you to live in an area that might otherwise be beyond your budget. This strategy lets you live where you want while still stepping onto the property ladder.
The strategy offers potential capital gains from your investment property while offsetting your own rental costs. If your investment property increases in value over time, it can help you build equity that can be leveraged for your next investment property or eventual dream home. Rentvesting enables buyers to invest in property in areas with strong growth potential or rental income while maintaining their preferred city lifestyle.
Definition of rentvesting
Rentvesting is a home-owning strategy that involves buying an investment property in a more affordable area and renting it out, while simultaneously renting a place to live in a desired area. This approach allows individuals to enter the property market, build wealth, and achieve their lifestyle goals, despite rising property prices and interest rates. By buying an investment property in a location with strong growth potential, you can benefit from property appreciation and rental income, all while enjoying the flexibility of living in your preferred area.
How rentvesting Works
Rentvesting works by leveraging the rental income from an investment property to offset the mortgage repayments, while also providing a potential long-term capital gain. The process typically involves:
- Buying an investment property in a more affordable area, often outside of metro centers.
- Renting out the investment property to tenants, generating rental income.
- Using the rental income to offset mortgage repayments, reducing your financial burden.
- Renting a place to live in a desired area, which may be more expensive than the investment property.
This strategy allows you to build equity in an investment property while maintaining your desired lifestyle, making it a smart choice for many aspiring homeowners.
Benefits of rentvesting for first home buyers
Rentvesting offers several benefits for first home buyers, including:
- Affordability: Rentvesting allows first home buyers to enter the property market with a lower deposit, as the investment property can be purchased in a more affordable area.
- Flexibility: Rentvesting provides the flexibility to live in a desired area, while also building wealth through property investment.
- Potential for capital growth: Rentvesting allows first home buyers to invest in a property that has potential for long-term capital growth, which can help build wealth over time.
- Tax benefits: Rentvesting can provide tax benefits, such as deductions for interest on loans, property management fees, and maintenance costs.
By leveraging these benefits, first home buyers can strategically position themselves for financial growth and stability.
Assessing your financial situation
Before diving into rentvesting, evaluate your financial readiness:
- Assess your income, expenses, savings, and credit score
- Consider your investment timeline and risk tolerance
- Factor in ongoing home ownership costs like mortgage payments, strata costs, property management fees, and maintenance
- Calculate whether rental income can cover mortgage repayments
- Evaluate potential tax implications and tax deductible expenses
- Understand that you may need to pay tax on any capital gains when selling an investment property, but also consider potential tax benefits for rentvestors
- Consider how rentvesting aligns with your property journey and long-term goals
- Understand you’ll need to pay fees such as stamp duty and may not be eligible for the home owners grant
Evaluating your financial readiness for rentvesting
Before embarking on a rentvesting strategy, it’s essential to evaluate your financial readiness.
Consider the following:
- Cash flow: Ensure you have sufficient cash flow to cover both rent and loan repayments.
- Deposit: Save for a deposit, which can be lower for an investment property.
- Ongoing costs: Factor in ongoing maintenance fees, council rates, and property management fees.
- Tax implications: Consult with a tax adviser or accountant to understand the tax implications of becoming an investor.
By thoroughly assessing your financial situation, you can make informed decisions and set yourself up for successful rentvesting.
Assessing your investment timeline and home ownership costs
When assessing your investment timeline and ongoing home ownership costs, consider the following:
- Investment timeline: Determine how long you plan to hold the investment property, as this will impact your investment strategy. Do you have an equity or income goal?
- Ongoing costs: Factor in ongoing costs, such as mortgage repayments, maintenance fees, and council rates.
- Capital gains tax: Understand the potential capital gains tax liability when selling the investment property.
- Property management fees: Consider the costs of property management fees, which can impact your cash flow.
By carefully planning your investment timeline and accounting for ongoing costs, you can better manage your finances and maximize the benefits of rentvesting.
Choosing the right investment property
When selecting an investment property, focus on:
- Properties with low property maintenance requirements, considering age and condition
- Local property market conditions in both regional areas and capital cities
- Possibility of using your existing home's equity to invest
- Upfront costs including home loan deposit requirements
- Building a diversified portfolio across different property types and locations
- Whether you're looking for positive cash flow or capital growth
- Understanding the difference between owner occupied properties and investment properties
Managing your investment
Successful property management involves:
- Understanding when you’ll need to pay capital gains tax and potential tax deductions
- Recognizing potential tax benefits, such as claiming interest payments on loans, depreciation costs, and various rental expenses as tax deductions
- Minimizing maintenance costs while maximizing rental income
- Working effectively with a leasing agent or property manager to handle day-to-day tasks
- Managing council rates and other ongoing expenses
- Preparing for potential challenges like changing tenants
- Recognizing that an investment property decreases in value sometimes, affecting your financial position
Building a property portfolio
To grow your rentvesting portfolio:
- Develop strategies for scaling your investments across multiple properties
- Diversify with other investments to minimize risk
- Consider buying an investment property in different markets to spread risk
- Look for opportunities to build wealth through property and other assets
- Work with experienced real estate agents who understand local markets
- Use equity from your first property to fund additional purchases
Tax implications of rentvesting
Capital gains tax for rentvestors
When selling your investment property, you'll need to pay capital gains tax (CGT) on any profit made. For rentvestors, understanding CGT is crucial:
- CGT is calculated based on the difference between the sale price and purchase price, minus allowable deductions
- Your primary residence typically has different tax treatment than investment properties
- Minimize your CGT liability by keeping accurate records, considering longer-term investments, and seeking professional advice
Maximising tax benefits
- Consult with tax professionals about attractive tax benefits available to investors
- Claim tax deductions for expenses related to your investment property
- Interest charged on your investment loan is often tax deductible
- Consider strategies like negative gearing where appropriate
Getting started with rentvesting
Saving and financing
- Save for a home loan deposit to secure an investment loan
- Compare lenders to find competitive interest rates
- Work with mortgage brokers (like us) to navigate financing options
- Understand loan repayments and how they affect your cash flow
Finding the right property
Finding the right investment property requires:
- Thorough research of local property markets, rental yields, and growth prospects
- Clear investment goals regarding rental income or capital growth
- Careful consideration of location factors like demand and infrastructure
- Deciding between affordable outer suburbs or potentially more expensive property in inner city areas
- Thorough property inspections
When rentvesting, many investors decide to work with a buyer's agent to help them find a property that meets their investment goals of yeild and capital gains.
At Felix, we work with brilliant, nationally-licensed buyer's agents to help our clients secure property that meets their goals.
When working with buyers agents:
- Choose experienced agents familiar with investment properties
- Communicate your investment goals clearly
- Ask detailed questions about the property and market
- Ask how many properties they helped purchase in the last year
- Watch for red flags like high fees, lack of transparency, or pressure tactics
Understanding the property market
Market research
- Research local property trends, prices, and potential returns
- Analyse factors affecting property values like population growth and infrastructure development
- Consider economic indicators that might impact your investment
- Get into the property market sooner rather than waiting to afford your dream home
Property price factors
Property prices and potential capital gains are influenced by:
- Supply and demand dynamics between owner occupiers and investors
- Interest rates and lending conditions
- Government policies and regulations
- Property type, location, and condition
Be aware that property investments carry risk—if your investment property decreases in value, you may face selling your investment property at a loss.
Competitive market tips
- Organize your finances before house hunting so you can act quickly
- Consider working with a buyer's agent experienced in your target area
- Keep an open mind about properties with renovation potential
- Research areas where you can afford the loan repayments on a suitable property
Pros and cons of rentvesting
Pros
- Enter the property market sooner than waiting to buy your dream home
- Build equity while enjoying your preferred lifestyle
- Tax deductible expenses can improve your financial position
- Potential to build wealth through property appreciation
- Flexibility to live where you want without sacrificing home ownership
Cons of rentvesting
- You'll eventually pay capital gains tax when selling
- Managing an investment property adds complexity to your finances
- Property values can decline (investment property decreases)
- Dealing with tenants and property maintenance
- Missing out on some first home buyer benefits for owner occupied properties
The bottom line
Rentvesting offers a practical path to property ownership while maintaining lifestyle flexibility. While it provides potential capital gains and investment growth opportunities, it also carries risks that should be carefully considered.
For successful rentvesting:
- Work with experienced professionals including mortgage brokers, real estate agents and property managers
- Develop strategies to minimize risk and maximize returns
- Stay informed about market conditions and tax implications
- Take a long-term approach to building your property portfolio
This information is of a general nature. As mortgage brokers, we can provide personalized advice for your specific situation and help you navigate your property journey toward home ownership.
