While the term ‘rentvesting’ might be fairly new, the idea isn’t. Rentvesting is where someone purchases a property, but – rather than live in it themselves – keep renting elsewhere while using their new purchase as an investment.
The incidence of rentvesting has been on a steady increase over recent years, especially with first home buyers. With an estimated 35% of first homebuyer loans going to people who still plan to rent where they live, it’s worth understanding the pros and cons of this strategy.
Rentvesting upsides
There are three big reasons for people to rentvest.
First, people might be on a great deal where they’re renting, and would prefer to stay there. Whether it’s cheap rent, close to work, close to family or just a great area, some people would prefer to stay put. But with real estate being a historically good investment, the lure to purchase a property might be strong. And if they can afford a deposit, then getting into the property market might be a great plan.
A second reason, linked to the first, is that people might not be able to afford to purchase in the area they want to live in. Perhaps they’re a young couple who love the inner-urban lifestyle, or mature buyers who want to stay close to family. Whatever the reason, paying a smaller deposit and renting in an outer-urban or regional area is another great way to get a foothold in the property market, and maybe even secure a nice place to retire to in the longer term.
And speaking of the longer term, depending on your particular circumstances, rentvesting might be a sound financial plan. You’d need to get financial advice first from a suitable industry professional but, for some people, renting while also getting rental income can be a boon. Adding projected rental income to your assets means you can actually secure a bigger loan, meaning you might be able to buy a nicer place in a great location to rent out. If your work is far from the city and you can afford an inner-city location, for example, rentvesting could work for you.
Rentvesting downsides
One thing that anyone considering rentvesting needs to keep in mind is the “…vesting” part. Your property purchase is not to live in; it’s an investment. And all investments come with risk. While it seems almost inconceivable in today’s property market, steady rises in property values are not guaranteed. Prices can plateau – or even drop. As with most investments, property needs to be seen as a long-term strategy.
Investments also come with tax implications, and investment loans typically come with higher interest rates. You’ll also fork out home insurance premiums, rates and land tax. You’ll probably need to pay for a property manager too, unless you’ve got plenty of time to chase late rental payments and fix leaking toilets. Again, financial advice is essential.
Contact us
We’re always happy to discuss your situation and the state of the property market wherever you live in Australia. If you decide to purchase that rentvesting property, we can take the hassle out of finding suitable lenders and filling out all the forms. And best of all, you pay nothing.