Tips for successful rentvesting.
Are you keen to get on the property ownership ladder, but cannot afford to buy in the area where you want to live? There is another option available – rentvesting, which is becoming increasingly popular with buyers priced out of their desired suburb but still wanting to invest in property.
In this blog, our agents explain the principles of rentvesting and how to do it successfully.
What is rentvesting?
Rentvesting is a way to get onto the property ladder quicker or move up faster.
Typically, rentvestors lease a property in an area where they enjoy living but cannot afford to buy, while buying an investment property in a more affordable area (which they may not especially want to live in) to rent out with the end goal of growing their investment.
Done successfully, the practice allows buyers to balance property affordability and quality of living while building wealth.
Steps for rentvesting success
Save, save, save – the more significant your deposit, the less you will have to borrow, which means a better chance of receiving finance, paying less interest and borrowing without lender’s mortgage insurance.
Do your research – before investing in any property you need to understand its true market value. Research what similar local properties have recently sold or are currently selling for, as well as historical data on how the local property market has performed over the years.
Get a clear picture of how much a property could rent for by researching local rental prices, as well as current vacancy rates to understand local demand for rentals. If in doubt request a rental appraisal by a local property management company, who can assess how much the property could rent for and provide insights into the local rental market.
Do the sums - rentvesting is not a cheap option and property investment is a substantial financial commitment, so take the time to do the sums.
The whole point is to buy a property that will make you money in the future so as an investor make sure you understand the property’s potential yield and return. Yield is a measure of how much income (in the form of rent) a property can generate each year, while return is a measure of profit or loss when you sell the property.
Think long term – look for property in an area with high potential price growth in the long term, and be open-minded, remembering that even if somewhere might not be the hottest location right now, it could be in a few years.
Ideally your investment should be in an area with high demand and low supply– this is usually somewhere with good infrastructure and amenities such as schools, health facilities, services and transport, combined with a strong local economy.
Keep extra costs in mind – there are a lot of ongoing costs associated with property ownership that should be factored into your budget. Costs include home loan interest payments, property maintenance, council rates, insurance, etc. Always keep these top of mind.
Leave emotions at the door – buying an investment property should not come with the same level of emotional engagement as purchasing a home to live in. Focus on the property’s potential return (capital growth and rental yield) rather than emotional connection.
Things to consider before rentvesting
First home buyer grants and schemes – as you won’t be living in the property you are buying, rentvesting could cancel your eligibility for the various grants and schemes available for buyers in Australia.
Apartments versus houses – apartments can be easier to rent out than standalone houses, but in some areas they may not grow in value as much as houses.
Capital gains – the sale of an investment property attracts capital gains tax, which can eat into your sale profits.
Tax advantages – owning an investment property can offer tax advantages, with many expenses being tax-deductible – such as home loan interest payments, management fees, property maintenance, council rates, insurance, depreciation, etc.
Where investment expenses exceed rental income, this can be offset against taxable income in a strategy known as negative gearing, used by investors seeking long-term capital gain. Read more about tax deductions for investment property owners.
Seek professional advice – everyone’s situation is different, so before investing seek professional advice tailored to your lifestyle and investment goals. A professional advisor will take the time to carefully consider your unique situation before recommending the best property investment strategy.