The pros and cons of rentvesting

Ever heard of rentvesting? It's an alternative way of getting into the property market and achieving home ownership sooner rather than later.

Rentvesting is where you rent the property you want to live in, normally in a desired location, and then buy an investment property in a suburb you can afford.

But just like any investment strategy, there are pros and cons that should be considered.

Pros

Live where you want, invest where you can afford

Buying your first property in a sought after location can be out of reach for some people, especially if you are a first time buyer. While you are saving up for a deposit to buy a house in your dream location prices could be increasing at a faster rate than you are able to save. Rentvesting allows you to live in the area you want while buying in an area you can afford, allowing you to enter the property market much sooner using a smaller deposit.

Freedom and flexibility

When you rent, you have the ability to move around as you please, whether that’s to a different suburb, state or country. This ties in well if you live a life where you’re always on the go, or often travel for work or leisure.

Tax incentives

There are a number of attractive tax benefits that are available to property investors that are not available to owner occupiers. The costs associated with owning an investment property that are tax deductible include advertising for tenants, repairs and maintenance, home insurance, water and council rates and more.

Ability to grow your investment portfolio

If you are smart with your ‘rentvestment’ and the rent you have coming from your tenants is greater than your loan repayments, you will benefit from extra income. You can then reinvest these extra funds elsewhere and use it to grow your property portfolio at a much faster pace than if you were waiting for a property to appreciate in capital growth.

Cons

You are a tenant

Although you are the rental provider of your investment property, you are still a tenant in the property you are living in, which means dealing with rental inspections and the uncertainty of having to leave should the owner decide. The home you live in doesn’t belong to you and is quite often only temporary, plus any changes you want to make to the property will have to go through the property manager. Rentvesting won’t appeal to buyers looking for a long term permanent home.

Rent money

When you are renting you are essentially paying off someone else’s mortgage, to a lot of people they see this as a waste of money. If you would prefer to live in the home you are paying the mortgage off of, then rentvesting is probably not for you.

Time consuming

Rentvesting means you are a tenant and a rental provider at the same time. You have to make sure your property investment is being looked after by the tenants and stay on top of maintenance requests which can be very time consuming. This is where a REIWA property manager can come into play, as they can take the stress away and act as the middleman.

Miss out on the FHOG

The First Home Owner Grant is only available to owner occupier first home buyers who are buying or building a new home, this doesn’t count for investment properties. If you choose to rentvest instead of build a new home, you will forfeit your eligibility for the grant.

Also, when it comes to selling your investment property (unless you have lived in the property for 12 months) you have to pay capital gains tax (CGT) which means paying tax on the profit margin.

To be successful at rentvesting, you need to look at the rental returns and capital growth predictions of a median priced investment property and then compare this to the rental returns and capital growth of more expensive property that you would want to live in.

If you are considering rentvesting, it is important to do your homework. You may also want to consider hiring a REIWA buyer's agent for advice on where to buy and for help with finding a property.