Is Rentvesting For You?
For most people, there are three main goals in life: Get a job, start a family and own a home. But with house prices increasing at an average of 2.7% per annum, against a growth of 1.9% per annum in household income since 1960, as a millennial, entering the property market can seem like a fleeting goal. But settling for 2 out of 3 shouldn’t be on your agenda, and neither does it have to be that way. Here’s how rentvesting can help you:
Just as time inflates our cost of living, our ideas and values also change, titillating the notion that perhaps we should start looking at attaining our Australian dreams differently from baby boomers – controversial, I know.
Some call it crazy. Some call it backwards. Others call it Rentvesting, and it might just be the right strategy for you.
Rentvesting is not a new concept, but in light of rising property prices and changing attitudes, it has become increasingly popular amongst first home buyers unwilling to sacrifice location for their ideal home. Allowing property investors to live wherever they want via renting, and invest in areas that are both affordable and high performing, rentvesting gives people the flexibility to not be geographically bound to their investment which makes entering the market that much more attainable.
According to a Reserve Bank of Australia discussion paper, despite the rising rate of rent and property, there’s been very little difference in the long-term economic situation of buyers and renters since 1955. Therefore renting while you’re investing, as opposed to just buying a home, can put you ahead in your plans and land you a second investment much faster.
If rentvesting sounds like its too good to be true, it’s because it is. Success only comes from careful planning and research which is absolutely necessary to avoid falling through the cracks. Rentvesting can be your smartest financial decision, but it requires a lot of work, and it’s by no means a get-rich-quick scheme. Before endeavouring, you’ll need to consider the following factors:
When it comes to taxation, there are both positives and negatives. An immediate benefit of owning a rental property is tax deductions for related expenses including body corporate fees, council rates, water charges, cleaning, insurance, maintenance and depreciation.
Negative gearing is also another positive and happens when your property loses more money than it makes on a regular basis. Now, I know what you’re thinking – how is that a good thing? It’s not as bad as it sounds because the ideal benefit of negative gearing is that your property goes up in value, and any loss can offset any other income earned, reducing your taxable income and therefore your tax payable.
However, when it comes to selling your investment property, Capital Gains Tax (CGT) will play a role in your profits. The taxed amount varies depending on how much profit you’ve made as a landlord, your income, and duration of ownership, but either way, expect it to be costly.
Choosing the one
Even though negative gearing can be used to its advantage, your ideal situation for rentvesting is to find a property that will ensure a neutral cash flow. A neutral asset will have rental income that is equal to its mortgage and all other monthly expenses, allowing you to pay your own rent stress-free.
Ultimately, you’ll want a property that can exceed in returns. With positive gearing properties, money from your rental income can cover your own rent and go the extra mile. But assessing your rental property’s performance isn’t as simple as comparing its income to your mortgage repayments. Taking into account expenses such as insurance, repairs, property management fees and the cost of vacancies is essential. Positive gearing properties are generally found by buying units, apartments and smaller homes which attract young professionals or small families who are willing to fork out a little more money for rent.
A great rentvestment property works out best when you buy in an area that you can easily afford, otherwise rentvesting will be deemed purposeless and you’ll end up biting off more than you can chew. Instead of stretching your finances, you’ll need to find a sweet spot in an area that is both easily attainable, will likely increase in value in future years, and is low maintenance. This way you’ll have the freedom to continue saving for your second property, while already setting foot in the market.
Summary of Pros and Cons of Rentvesting
Of course, every decision you make boils down to your own personal circumstances and values. Speaking to a professional advisor about your options is always advised, to make sure you’re making the right choices for you and your family.