Rentvestment

Nope, we didn’t just spell “reinvesting” wrong. “Rentvesting” is a new trend that’s been cropping up among savvy property investors of late and, when done correctly, can be quite a brilliant strategy.

Whether you’ve already heard talk of rentvesting among your mates or are simply curious to find out more, then join us for an overview of one of the latest trending property investment strategies.

Rentvesting

We will clue you in on what exactly rentvesting is, what it involves, and even go over a list of some of the pros and cons that go along with it.

We will also go over a list of essential steps for rentvesters, just in case you decide it sounds like the perfect wealth-building tactic for you.

Rentvesters are a new breed of home buyers who have found a win-win solution to the age-old “rent or buy” real estate question. Many rentvesters start out as renters who are really enjoying living in a city that they can’t actually afford to buy property in, even though they’d love to get into the property market.

Imagine, for instance, that you were renting an apartment in Sydney and loving every minute of living the big city life with your friends.

While you’d love to invest in the local housing market, you just don’t have the cash flow to purchase a home there. Given that much of your money already goes towards your current rental payments, you’re looking at a long road when it comes to saving up enough to cover the upfront costs of a mortgage on rising inner-city property prices.

Okay, so you could conceivably afford to own a home in a cheaper city. But the thought of being forced to leave Sydney behind just doesn’t seem worth pursuing a feasible property purchase price.

This is the sort of financial situation that rentvesters are born from.

Rather than choosing between the prospect of renting in an ideal location vs. entering the property market sooner in a cheaper area, rentvesters discovered a way to do both.

They buy an investment property in an affordable area and turn it into a rental property rather than live in it themselves. In the meantime, they continue to rent in the more expensive city where they actually want to live.

This way, they build a property portfolio while still continuing to enjoy renting in an area that fits their lifestyle.

But does it really make sense to take out a home loan, only to put yourself in the position to have to come up with mortgage repayments and rent at the same time each month? In truth, the answer largely depends on your personal circumstances and goals.

Let’s take a closer look at the benefits of investment properties as well as the cons of rentvesting to help you decide.

Among the most obvious draws of rentvesting is that it allows you to start moving up the property ladder now, while still having the flexibility that comes with renting.

Owning a rental property can be a great long-term investment that may even help you save for your dream home under the right circumstances.

Here are some of the main draws that have made rentvesting so popular:

The Benefit of Rental Income

The trick to rentvesting lies in finding a suitable property for generating dependable rental income. In other words, you wouldn’t be doing yourself any favors by purchasing the cheapest dump on the market. The only exception, of course, is if you’re a first-rate redeveloper who fully understands what you’re getting into and the costs involved.

Ideally, your investment property should be one that plenty of people would actually want to live in, even if you wouldn’t at the present time. By ensuring that your property is fairly easy to rent out, you can generate a nice flow of income from the monthly rental payments.

Depending on how much rent you’re able to charge, you can use the payments for partial or full monthly principal and interest repayments on the property.

Potential Tax Benefits

Another bonus of rentvesting can come in the form of tax benefits that you may be able to claim on certain investment property expenses. The interest charged on an investment loan, insurance, advertising, and even depreciation costs, are all examples of expenses that are commonly tax-deductible.

That said, it’s important to seek advice from a professional to fully understand exactly which aspects of your investment property you’ll have to pay tax on and which may qualify for a tax deduction.

Potential Capital Gains

The hope with any investment is that it will go up in value over time. Rentvesting is a way to buy into the property market now instead of waiting for the day to arrive when you can afford to buy your dream home. By selecting an investment property in the right area, you may be able to sell it for a profit down the line if its value increases.

Ultimately, you might even decide to live on the property yourself. You could even continue to draw rental income by choosing to rent out certain rooms at the same time. In that case, it would become an owner-occupied property, which can turn out to be a great situation for the right landlord and tenants.

Continue Enjoying the Perks for Renting

While you may not have enough borrowing power to purchase a home in Sydney or Melbourne, rentvesting allows you to continue to live in the city of your choice, all while enjoying rental income from your investment property.

Aside from presenting you with the opportunity to build wealth, rentvesting also allows you to continue enjoying the benefits of renting the home where you currently live.

Renter’s perks include things like letting your landlord take care of maintenance and repair costs, the fun of living in the inner city without the high mortgage costs, and the ability to move whenever you want without having to worry about paying capital gains tax.

The Benefits of an Offset Account

An offset account is also a potential benefit you may be able to reap the rewards of as a property investor. Offset accounts are bank accounts that can be linked to investment or home loans. While they don’t earn interest like a savings account, the bank will take your current balance into consideration when calculating your interest.

If your financial situation allows you to park extra money in your offset account, you could end up saving on interest and pay off your investment or home loan faster.

So far, rentvesting is sounding pretty great, isn’t it?

Not so fast.

Before you speak to your mortgage broker about taking out a home loan to buy your own investment property, it’s important we cover both sides of the rentvesting coin. Here are some things to consider when it comes to the pros and cons of rentvesting.

Landlord and Home Owner Responsibilities

Remember all the great benefits of renting we were just discussing?

Keep in mind that you’ll be taking on many of the responsibilities you usually leave up to your landlord when you have tenants of your own.

You’ll be responsible for any costs associated with the management, repairs, and upkeep that your property investment incurs. You’ll also be expected to pay lenders mortgage insurance, which is definitely a cost you’ll want to factor into your plans.

You may even want to set aside some of your rental yields in anticipation of these costs and consider hiring a property manager if you don’t plan to live near your property. Depending on the size of the rental yield you enjoy, there’s a chance that some expenses could end up coming out of your own pocket if you don’t plan ahead.

Potential Capital Loss

The property market can be fickle, which is the ultimate pro or con depending on the circumstances. If things end up going your way, then the pros of rentvesting will include enjoying better rates on a home loan now as well as a higher property value in the future.

If the market fails to cooperate with your plans, however, there’s always a chance that your property could actually depreciate in value.

This tends to be where property managers show their value. Hiring one is a good idea, assuming you can afford it, especially if you don’t plan to live close enough to your property to take care of repairs and upkeep on your own.

Also, be aware that you’ll be subject to capital gains tax liability if and when you do eventually decide to sell the property.

You’ll Lose Out on the First Home Owners Grant

The First Home Owners Grant is also something you’ll want to seek advice on from a relevant credit provider. The grant is designed to offer between $7,000 and $29,290 to certain first-time home buyers, but usually only under the condition that they plan to occupy their new property for at least the first year. Rules can vary depending on state or territory, so it’s something that’s worth asking about.

Whether or not rentvesting is the right strategy for you will ultimately depend on everything from your own personal objectives to your financial circumstances and goals. As the old saying goes, “rent money is dead money,” due to the fact that it doesn’t come with the possibility of capital gain.

Rentvesting requires understanding your own circumstances well enough to determine if putting extra money into paying off an investment or home loan each month is a realistic goal for you.

After all, real estate is far from the only form of investment available and you may decide that you’d rather invest your funds in the stock market or another investment vehicle.

But if you do dream of owning your own home someday, then rentvesting is worth considering. This is especially true if you aren’t quite ready to settle down or can’t currently afford to buy a home in an area you like.

If it is a path you decide to pursue, then we recommend seeking out a great deal of financial advice from experts. Personal advice from a credit representative or trusted broker can help ensure that you make the right moves to generate the best return on your investment.

If rentvesting has piqued your interest, then you may be wondering what the next steps would be if you decided to go for it.

You probably won’t be surprised to discover that the entire process involves a great deal of persistence, research, and guidance.

But we’ll break things down into simple guidelines to give you a broad overview of what each step should involve. This will give you a basic idea of what the process entails and an understanding of where to start.

  1. Get To Know the Property Market: Finding a great investment property in the right area is going to go a long way towards generating a positive cash flow. Get familiar with the national property market and pinpoint which areas are predicted to enjoy the most growth in the future.
  2. Research Rental Rates: Look into the average rental rates in the areas with the highest projected growth rates. By figuring out how much you could reasonably charge for the properties you’re considering, you can begin to narrow down which will generate the best rental yields.
  3. Decide on a Target Price: It’s important to create a realistic price range based on your financial situation. At this point, you may even want to seek independent advice from a financial professional. They’ll help you factor in things like tax deductions and give you tax advice on additional expenses you may not have considered.
  4. Look Into Loans: Next, you’ll want to begin working with a broker who can offer you advice on the best home loans for your unique situation. A great finance and mortgage broker should be able to walk you through everything from lending criteria to the application process.
  5. Purchase Your Property: Last but not least, it’s time to take the plunge and purchase your investment property. By this point, you should have already factored in whether or not you plan to hire a property manager. If so, this will be the time to get acquainted with them. Now all that’s left to do is find the ideal tenants (don’t be afraid to be picky; a good tenant goes a long way) and watch as your investment starts to blossom.

At first glance, the process may seem a bit intimidating, but as a huge array of rentvesters have already proven, it’s certainly doable with enough persistence. Feel free to contact us for answers to any questions you may have about any step along the way. While becoming a rentvester can come with plenty of pitfalls to navigate, we’re be happy to help guide you on your journey and help you make the smartest money decisions possible along the way.

Hopefully, we’ve been able to give you a solid enough overview of rentvesting and how it works to help you determine whether or not it’s something you might like to pursue. While it’s not for everyone, there’s definitely a reason that rentvesting has caught on with so many Australians lately.

As you may have already gleaned, in order to achieve success as a rentvester you’ll need to have either an incredibly thorough knowledge of money and finance or the help of someone who does.

That’s where we’d love to come in if you’ll have us. At It’s Simple, we strive each day to live up to our name by breaking down your goals into an achievable path that’s easy to understand.

Our team of licensed brokers is happy to help you decide whether rentvesting is the right investment strategy for you. If it turns out that it is, we’ll work closely with you on every step of the journey.

Even if you decide that rentvesting is not the best choice for you, we’d be happy to hear from you anyway. Our brokers offer expert advice on a large range of financial goals, ranging from mortgage repayments to car and construction loans.

Rest assured that we work for you, not the lenders. That means that if something sounds like a risky financial choice, we’ll let you know and help you come up with better ways to approach the situation. We believe that any goal is attainable with the right approach and our aim is to help you find it by working with you to craft the best plan possible.

Whether you’re looking to purchase a house you actually plan to live in or want to build your own home from the ground up, our team is standing by to help you find the perfect lenders to help you do it.

Reach out to us any time and we’ll have a chat to see how we can help turn your dreams for the future into a reality.

Download Your Free Guide.

In addition to your deposit, there will be other upfront fees and charges. Calculate your stamp duty using our simple calculator.

Our Blog.

21, June, 2022 - Blog
Choosing Between Fixed and Variable Rate Home Loans

Considering the recent interest rate hikes, more than ever, it’s important to consider all options to avoid paying more on your mortgage. Following the RBA’s 50-basis-point hike in the cash rate on 7 June 2022, it is no surprise that many banks increased their rates as well. Australia’s big four already announced that they would […]

16, June, 2022 - Blog
Surviving RBA’s highest rate hike in 22 years

The Reserve Bank of Australia’s highest single-raise cash rate in 22 years leaves everyone thinking, ‘How can I handle this?’ In a statement made by RBA governor, Philip Lowe, the Board decided to increase the interest rate by 50 basis points leading to the cash rate of 0.85%. So, where does this leave you? Here’s […]

15, May, 2022 - News
Price Caps Raised For Home Guarantees

Prime Minister Scott Morrison has just recently declared that the government’s Home Guarantee Scheme will have higher maximum property prices and more available places per year. From July 1, this price upgrade will qualify houses in two out of five (40%) suburbs nationwide for the scheme. This is up from 24.1% according to analysis by […]