The term, ‘rentvesting’ has gained popularity over the last couple of years. It simply means buying an investment property that you can afford, while you continue to rent
Rentvesting is a popular option when we hear one of the most common questions we’ve been getting over the last few years. It comes from people that are currently renting or still living at home with their parents.
The question is, “should I buy a place to live in or should I buy an investment property”?
Now a property guru would offer logic and number crunching to show that there is very little difference in outcomes, and you are probably better off renting because of negative gearing benefits and other tax advantages. However logic isn’t the prime motivator when making this decision. Buying an owner-occupied property will be more of an emotional decision, as you’ll want to like living where you want to live for all of your own unique personal reasons.
Therefore the answer of whether to buy to live in – or invest – comes down to getting finance and your own personal budget properly considered and organised. Can you afford to buy a property where you want to live? If the answer is yes, and you’ve always had the, “great Aussie dream” to own your own principal place of residence (PPOR), then that’s what you should probably do. If the answer is no, you can’t afford to buy where you want to live, but you can get finance for an investment property, then you should consider rentvesting.
The hysteria from the mainstream media about housing affordability would have you believe that first home buyers are pre-destined to be shut out of the property market and stuck renting forever at the mercy of greedy landlords. The reality is that rentvesting is a smart way around this, and it’s been happening for many years.
In fact, last year a survey by Mortgage Choice indicated that a third of investors were rentvesting – first time buyers who hadn’t purchased their own home
So here are some reasons why some smart people are deciding to adopt this strategy:
- Getting on the property ladder quicker. With a smaller deposit required compared to an owner-occupied property (and throw in some negative gearing benefits with rental income), your holding costs will be minimised and you can get into property ownership sooner.
- Rent where you want to live. When you consider what the mortgage repayments would be on the property you are renting compared to the actual rent you are paying, you are often way in front financially. Some people say that rent is dead money, however this is not the case if you’re living where you want and investing the difference.
- Invest wherever you want. Australia is made up of literally hundreds of property markets and at any one time there will be markets on an upswing in terms of capital growth. Diversifying into different markets gives you access to different price points and cash-flows. If you’re not sure about where to buy then a good property adviser and buyers agent should help to remove the guesswork for you.
- Grow your wealth. If you purchase an investment property for $400K and it increases in value by 5% after 12 months, then your gross capital return for that short period of time is $20K. This capital return should build up over time and eventually you may decide to leverage using this equity and buy another property. On the other hand, if you decide not to invest, then your gross capital return will be zero.