Rentvesting: pros and cons
Rentvesting is investing in one property while living in another rental property yourself. Know the pros and cons and find out if this is the ideal property investment strategy for you.
Rentvesting is a combination of renting and investing. It is investing in one property while living in another rental property yourself. So, essentially, your mortgage is being subsidised by someone else paying rent.
This has become a popular strategy among new investors because of the flexibility it offers. However, there are significant drawbacks homebuyers must be aware of before moving forward with this investment plan.
Below, we break down the basics of rentvesting and the pros and cons that come with it:
How does rentvesting work?
Renvesting is when homeowners invest in one property while living in another rental property. Buyers will purchase a property in a more affordable area and rent it out, while they rent out a property in their ideal suburb.
Often, homebuyers opt for rentvesting because property in their desired neighbourhood is out of their price range. By buying a property in a lower-cost area and renting it out, homebuyers can enjoy some of the benefits of property investment (e.g., build equity, capital growth, additional cash flow), while living in their desired neighbourhood.
The pros of investing while renting
Many buyer-investors use rentvesting as a way to get the best of both worlds. They can live in their ideal suburb while reaping the benefits of an investment property. Other renvesting perks include:
Renvesting gives you additional cash flow
Since you’re renting out the property, you can use the rental income towards the mortgage payments. The tenants are helping you pay the mortgage on that property while it (hopefully) rises in value.
Investing may offer tax benefits
According to the ATO, certain investment property expenses can be claimed as tax deductions. Chief among deductible expenses are interest repayments on your loan. You still have to repay the principal, but the extra interest charges can be deducted.
You can also typically deduct management costs, maintenance costs and other borrowing expenses on your tax return. This may include:
- Advertising to find new tenants
- Bank fees and loan charges
- Body corporate fees, cleaning costs and council rates
- Home, contents and landlord insurance
- Legal expenses and land tax
- Repairs and maintenance
- Loan establishment fees
- Lender’s mortgage insurance (if applicable)
- Mortgage broker fees (if you used one)
- Stamp duty charged on the mortgage
There's also negative gearing to take into account. If you make a loss on your property, your overall taxable income can be reduced. So, an investment property can be very economical, and in some cases can even help supplement the rent you pay. It’s best to speak with an accountant for advice on this.
You don't have to sacrifice your lifestyle
Say you've got your eye on a nice house in the suburbs, and you have the money to buy it, but you're not in a position to live in it right now. Finding a rental property in these desirable areas is much easier than finding a house to buy and will usually be way more affordable.
In the meantime, you can buy that further-out property and rent it out to someone else, and when the time is right, you have a house ready-made for you to move into.
Rentvesting is therefore normally suitable for people with short-term living goals, who still want to make a long-term investment. This is why it's so popular among young first-home buyers, who may want a more flexible lifestyle.
You can build equity in the home
If the property you buy makes capital gains (i.e., it increases in value), then you can build equity in that property without having to live in it. Building equity in a property can make refinancing to another loan or buying another property much easier, all while you continue to rent in your desired location.
The cons of investing while renting
Of course, there are drawbacks to the rentvesting strategy. Here are a few disadvantages of renvesting that you should consider:
The costs can be high
Many investment property expenses are tax-deductible, but not all. And even the deductible costs (like maintenance) still require a lot of admin on your behalf, like fixing broken fittings or plumbing. As a landlord, it's still up to you to arrange repairs.
Plus, there are non-tax-deductible costs, as well as unexpected costs like damage to the property from natural causes, which can be very expensive. There's more to owning an investment property than just meeting repayments every month, and it can cost more than money.
When it comes to home finance, taking out an investment home loan is a bit more expensive compared to a standard home loan. This is because interest rates for investment property loans are slightly higher.
You may not be eligible for first home owner grants
If you're a first home buyer, then buying an investment property could see you lose access to the First Home Owner Grants, which in certain states require you not own any residential property before. These grants typically provide some useful stamp duty concessions.
You do relinquish some control if you decide to keep renting:
- You can't make any material changes to the property without permission.
- You have to put up with inspections and body corporate.
- Your rent can increase at any time
Rentvesting means you might have to deal with a landlord a little while longer, but this isn't an issue if you can maintain a good relationship with them.
Additional Risks
Investment is inherently a risk, and property is not immune, as shown by the property market swings of the last few years. If you do decide to rentvest, then carefully consider the property before you buy it, because it can be an expensive mistake to make.
How to decide if rentvesting is right for you
For someone in a major city who has some spare cash lying around, is ready to buy a property but doesn't want to commit to a life in the suburbs just yet, rentvesting can be an ideal strategy. But if you're looking to settle down and are in a good position financially, then home ownership could be the right choice.
The best choice for you will depend on where you are in life or what you want to achieve. Speaking to a qualified accountant or financial advisor would be a good idea for a decision this big.
If you’re looking for home finance options, discuss your needs with the friendly lending specialists at loans.com.au. Check out our range of home loan options for both residential and investment properties. Get in touch with us today by calling 13 10 90 or start your online application today!
Disclaimer: The information provided in this article is general in nature and does not constitute financial or legal advice. Please seek professional advice tailored to your circumstances before making any financial decisions.
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