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The Risks and Rewards of Rentvesting

rewards of renvesting

Most people have heard of rentvesting: it’s where you rent where you want to live, but buy a property where you can afford.

It means you can keep renting in the area where you have built your life, but to get your foot on the property ladder, you buy a property in a different suburb, city or even state.

You might be renting in an area where the rent is manageable, but the cost of buying is well out of your reach. This is the kind of scenario that rentvesting is perfect for.

Is Rentvesting Really the Answer to Affordability Issues?

Here’s the reality: as property prices continue to climb upwards, many potential homebuyers have found themselves priced out of parts of major cities such as Sydney and Melbourne.

Property prices across the country are booming right now, so if you can’t afford to buy now in the area you’d prefer, it’s likely to be even less affordable a year or two from now.

That’s why many people are now exploring alternatives, to be able to get a foot in the door of the property market!

Is reinvesting a perfect solution? Not always. There are some downsides, which I’ll get to in a moment. But first, let’s discuss some of the benefits of rentvesting.

Benefits of Rentvesting

You Live Where You Want to Be – without Paying the Exorbitant Price

Renting a home is cheaper to sustain financially than buying in many areas. You might be paying $600 in rent on a home that costs $800,000 to buy. You will need a minimum of $80,000 deposit (or more to avoid paying LMI) and this is out of reach for many. But a $40,000 deposit on a cheaper investment property could be more achievable – and you don’t have to give up living in your ideal spot.

You Free Up Your Money to Invest Wisely

As a property investor, you want to have your finger on the pulse of where capital growth is happening. As a rentvestor, you may be able to purchase a greater number of inexpensive properties with long-term high growth and rental potential, rather than sinking all of your money into one expensive home.

You Don’t have to Put Down Roots Yet

If you’re at a point in life where you’re still not sure where you really want to be for the long term, rentvesting allows you to enter the property market without having to lock yourself down. You can still move, travel, even accept that job in another state, with the comfort of owning an asset (which your tenant is helping you to pay off).

You can Claim Tax-related Benefits

As a property investor, you’re able to claim deductions like mortgage interest, depreciation, insurance, real estate agent’s fees and maintenance. When you’re a homeowner, none of these expenses are tax deductible! This is one the key aspects of rentvesting that can really add appeal.

How Does Rentvesting Actually Work?

The best way to explain it is through a hypothetical example.

A young couple in their early 30s began rentvesting. They want to keep living in a capital city for their careers, but buying a home in their local area was well out of their price range – and they couldn’t see a time when it would become possible.

Instead of buying in Sydney, they chose to rent a place in their ideal suburb, while saving up for a property located in the Gold Coast – an area they chose for its relative affordability, rental demand and growth potential.

They bought an investment property for $400,000. A few years later, they used the growth in that investment to purchase a second investment property for $500,000. Five years later, they refinanced both investment property loans, and withdrew enough money to use as a deposit on a small home in Sydney.

Thanks to rentvesting, they were able to eventually buy their own home in Sydney, and they also now own three property assets. Now 40, they have plenty of options ahead of them:

  • Sell all three properties and use the profits to buy a bigger home.
  • Keep all three properties, and use the growth/equity to buy a bigger home as their needs change.
  • Keep going in their current set-up and reassess as their needs change.

This is a far better outcome than simply continuing to rent and saving for a property deposit for years and years…

That said, rentvesting does come with a few risks and downsides you need to be aware of:

Some Risks of Rentvesting

You Continue to be Tied to Your Landlord

As a tenant, you are not the one with control over your living space. That means that even when you are able to live in your dream location, you are not necessarily living in your dream home.

You’re at the Whim of the Rental Market

 If your landlord wants to hike the rent, sell the property or make any other big decisions, it’s completely out of your control.

You Miss Out on Government Benefits only Owner-occupiers can Claim

You won’t be eligible for the First Home Owners’ Grant and stamp duty concessions, which can be worth tens of thousands’ of dollars. Unfortunately, once you buy a home as an investor, you lose access to their grants and discounts for good.

There’s pros and cons to weigh up on both decisions, but the bottom line is: if you dream of owning a property, now is the time to look at all the options and make a plan to move you forward. If you’d like to find out your borrowing power and chat about your options, contact us today for an obligation-free chat on 1300 855 022.

Frequently Asked Questions

What is Rentvesting?

Rentvesting is a strategy where you rent in the area you want to live while buying a property in a location where you can afford. This allows you to get your foot on the property ladder without compromising your lifestyle.

What Are the Benefits of Rentvesting?

Rentvesting offers several benefits, such as living where you want without the high cost of buying, freeing up money for wise investments, not having to put down roots yet, and claiming tax-related benefits as a property investor.

How Does Rentvesting Work?

Rentvesting involves renting a home in your preferred area while buying an investment property in a more affordable location. The growth in your investment can later be used to purchase additional properties or even a home in your desired area.

Are There Any Risks Associated with Rentvesting?

Yes, there are some risks, such as being tied to your landlord’s decisions, being subject to the whims of the rental market, and missing out on government benefits only available to owner-occupiers.

Can Rentvesting Help Me Buy a Home in My Preferred Area Eventually?

Yes, the growth in your investment property can be used to eventually buy a home in your preferred area, as illustrated in the article’s hypothetical example.

How Can Zippy Financial Assist Me with Rentvesting?

Zippy Financial specializes in home loans, property investment, and commercial lending. They can help you understand your borrowing power and find the right loan for your rentvesting strategy.

Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business. 

About the Author:   

Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.   

Connect with Louisa on Linkedin.   

Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).    

Disclaimer:This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.  r-less normal distribution of letters. making it look like readable English.

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Over the past 12 months there has been a deterioration of rents in the inner city unit markets across both Sydney and Melbourne. Rent values have fallen -4.9% in Sydney and -8.2% in Melbourne since March 2020. This has mainly come from the inner city regions. CoreLogic estimates that the City and Inner South market of Sydney accounts for 18.6% of investment units across the Greater Sydney region. The Melbourne inner region makes up an estimated 45.9% of investment units in the greater capital city.

Over the 12 months to March 2021, which captures 12 months since Covid restrictions were implemented, the City and inner south of Sydney has seen a -14.5% decline in the median asking rents from $620 per week to $530 per week. The median asking rents in Melbourne’s inner region sank by -18.9% from $475 per week to $385 per week.

These markets are disproportionately impacted by the closure of international borders where most overseas arrivals to Australia start out as renters. The halting of overseas migration has had a disproportionate impact on rental markets in these regions.

Whilst these markets are far from recovery there are signs that conditions may be stabilising. Median rents across units in the city and inner south of Sydney were lower over the year but have since risen 6.0% from a recent low of $500 per week in December.

Total unit rental stock on the market across Sydney and Melbourne is falling. In the month ending 11th April, the number of listed rentals did decline.

The elevated rent listings volume through the second half of 2020 across inner Melbourne shows how an extended lockdown and social distancing restrictions across the city had contributed to a deterioration in rents.

There are a number of reasons which may explain the curious stabilisation of inner city unit markets:

Conditions across inner city units seem to be stabilising, it is clear that the unit markets do have a long way to go before rents see a more consistent recovery trend. The return of international visitation to Australia has previously kept the rental markets buoyant amid high levels of new supply. A full recovery of rental incomes is unlikely until international arrivals are closer to pre covid levels.

Source: CoreLogic, April 2020

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