With house prices at record highs in many parts of the country, many prospective home buyers are facing a real challenge, particularly younger Australians on the wrong side of the increasing generational wealth gap. Renting and investing – or ‘rentvesting’ – is an increasingly popular option buyers are exploring.
Rentvesting might seem counter intuitive – renting and paying off a mortgage at the same time. But depending on your lifestyle, life stage and income, for some, it may make sense to rent out an investment property in a more affordable town or suburb while continuing to live in the area of choice.
How does rentvesting work?
- Buy an investment property in an area affordable to your budget.
- Rent it out to deliver stable long-term returns from rental income and contribute that income to your mortgage.
- Continue to live in a rented property closer to your lifestyle, family and work needs – whether it’s a great beach, a great school or a great workplace.
The case for rentvesting…
The potential upside to rentvesting is you get to own a property that could increase in value while receiving a regular rental income and continuing to live in the suburb of your choice.
Some things to consider:
- You could potentially benefit from an uplift in property prices in the area where you buy, and then a capital gain when you sell.
- You may be able to deduct some expenses at tax time on the property you buy, such as interest payments, maintenance costs and property management fees.
- Meanwhile, you may not have to worry about paying for repairs on the rented property in which you are living – the landlord should take care of it.
… and the case against
But like anything, rentvesting isn’t without a potential downside.
- You may have to pay capital gains tax if you decide to sell your investment property.
- You won’t benefit from any uplift in property prices in the area you live, if you don’t own there.
- You’re the landlord, so you’re on the hook for keeping the investment property maintained and paying other costs – council rates, body corporate or property management fees – although you may be able to claim these as a tax deduction.
- Rental income may not always cover mortgage repayments so you may need to factor this into your budget.
- Rental properties are subject to periods of vacancy, which may require you to cover mortgage payments and expenses out of pocket until you find new tenants.
- Property values can fluctuate for a variety of reasons including changes in local market conditions, economic factors and housing trends. A downturn in the real estate market could potentially lower property values and impact investment returns.
Always speak to a financial adviser or seek legal advice before making any financial decisions.
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Please contact us if you have questions regarding the above information.
Sourced from: AMP