Is ‘rentvesting’ the new great Australian dream?

The Australian Dream is starting to take a different shape

Owning a home was once a cornerstone of the Great Australian Dream. With rising property prices, especially in Melbourne and Sydney, that dream is starting to take a different shape – rentvesting.

In general terms, rentvesting refers to when a person or family decide to rent where they want to live but still buy property elsewhere as an investment. For many, it’s an opportunity to break into the property market sooner than might otherwise have been possible.  

The growth in this approach to residential property was highlighted in a recent survey from Mortgage Choice, which revealed that in 2016, more than a third of first-home buyers in Australia were buying property not to live in, and therefore more likely to be rentvesting, up from 20 per cent two years ago.

As more Australians consider rentvesting as an option, Will Christie FCPA, a partner at Affinity Partners, and BOQ Specialist’s Trevor Robertson identify five top tips to consider when weighing up whether you should jump on the rentvesting bandwagon.

Make sure you know what you want

Many people live in the home that they have chosen because that’s the limit of the mortgage they can afford to pay. As a rentvestor, you might be better off spending your money on a property in a growing area that is more likely to build your wealth faster than the area you've identified as ideal for your own lifestyle.

In making that decision, BOQ Specialist’s Trevor Robertson says to consider what you want to achieve from the investment property at the outset.

“Your financial objectives not only influence what kind of property you look for and where, but will also affect your overall budget and your financial structure,” says Robertson.

Recognise the importance of financial flexibility 

Mortgage repayments can be one of the biggest financial strains on a household. While the balance can be slowly paid down over many years, the first few years can be hard. Having the flexibility to adjust budgets depending on your circumstances is an added bonus when renting. If your financial circumstances change, you have the ability to move down (or up) to a rental property that’s more suitable.

“If you get a promotion at work you could upgrade to rent in a better neighbourhood,” suggests Robertson.

“Or, if you fancy going on a trip of a lifetime abroad, you could downgrade to a small space.”  

Considering starting a family? Renting and investing elsewhere could also be a good option. It’s not as permanent as buying and offers the option of trading up for a larger space or relocating for the right school.

“While many people think rent money is dead money, the concept of handing over your pay packet to the landlord each week may be a better financial move than you think,” says Robertson.  

“You may be able to choose where you want to live and for how long, giving you greater financial flexibility.”

Realise the full responsibilities involved with buying property

Consider all the financial responsibilities associated with owning a property.  Make sure that you have total visibility of the potential expenses, such as the cost of a managing agent as well as strata bills, insurance and water. In addition, you will have rent to pay.

As a rentvestor not living in your investment property you will still be responsible for hidden expenses that might appear after you buy. Things to look into thoroughly include the quality of the roof, substantial cracks, pipes, drainage issues, roof damage, floor damage and asbestos, so you will need to do meticulous research.

Remember to bring your ‘investment eyes’ only

 

When working out whether to buy to live or buy and rent elsewhere, it’s a good idea to get an understanding of the likely costs and benefits of both, as well as the potential.

Higher-priced property can often mean lower rental yields as a percentage. On the other hand, lower-cost properties can generate a higher rental yield comparatively so you might be better off investing in a cheaper investment property with better rental yields.

It’s also worth getting a full picture of the potential of the area you are buying into. How are the schools and the local restaurants faring?  

Robertson suggests investigating the local community. “Check out schools and other amenities the local area has on offer, plus what’s on the drawing board over the coming decades, for example, upgrades to infrastructure.”

It’s also a good idea to check with the local neighbourhood watch or police to get an insight into the relative safety of the area.

“Nobody wants to live in a property in a high crime zone,” adds Robertson.

Make sure you understand the tax structure

“While interest repayments from an investment property are fully tax deductible, there are other great savings you can make at tax time,” says Christie.

“The tax benefits of an investment property, including depreciation and negative gearing, can help facilitate investors paying down the loan.”  

By using the rent coming in from your investment, plus any regular savings, the loan could be paid down much more quickly than if you bought and lived there straight away.

“However, caution should be exercised,” Christie warns. “Tax concessions can be altered with a change in government policy and can’t be relied upon.”

It’s important to consider your individual circumstances before deciding which option is right for you. There’s no stock-standard answer to whether you should or shouldn’t rentvest, but before you choose to rent and invest, make sure you explore all eventualities.

BOQ Specialist has developed a Buyer's Guide to help you navigate your way through property purchases.

BOQ Specialist - a division of Bank of Queensland Limited ABN 32 009 656 740 AFSL and Australian credit licence no. 244616. The information contained in this article (Information) is general in nature and has been provided in good faith, without taking into account your personal circumstances. While all reasonable care has been taken to ensure that the information is accurate and opinions fair and reasonable, no warranties in this regard are provided. We recommend that you obtain independent financial and tax advice before making any decisions.

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