Soaring property prices have many would-be home owners wondering how they will ever get a foot in the door.
Rentvesting is something to consider if you’re keen to break into the property market but can’t afford to buy in a suburb you want to live in.
The strategy involves buying property in an area with good rental yields and capital growth potential and then leasing it out, while renting somewhere else.
Like any investment, it comes with risks and isn’t a path to fast cash; it is a strategy that is best used as part of a long-term wealth creation plan.
Hard Line Wealth managing partner Cody Harmon said rentvesting was a way of building your wealth while still being able to have the lifestyle you want.
“You can have your cake and eat it too,” he said.
Mr Harmon said you should buy the ‘right’ type of property if you want to become a rentvestor.
“You want to own land, as much good-quality land as possible,” he said.
“That land would want to be in proximity to something desirable; usually that’s a CBD or good-quality coastline.”
Mr Harmon said older-style places with land were preferable to house-and-land packages and apartments.
He said it could be worth hiring a buyer’s advocate if you are hard pressed for time or lack confidence in your ability to find a quality property with high potential for capital growth.
It is also crucial to get your maths right, which means ensuring the rent you receive, minus expenses, is equal to or greater than the amount of rent you pay.
Here are some important considerations.
Become a home owner sooner and enjoy a good lifestyle
Plan Your Future founder Helen Nan said rentvesting can help you get into the property market if you can’t afford to buy your dream home straightaway.
“The biggest advantage can be entering the property market earlier,” she said.
“If you want to arrive at your financial destination earlier, it’s better to start earlier.”
It is a strategy that can work well for young people who are still living with their parents and only paying minimal rent, because they can pay off the mortgage on their investment property faster.
It also means you can live in an area that suits your lifestyle even if you can’t afford to own property in that postcode.
“It allows you the freedom to live where you want, not just somewhere where you can afford to buy,” Ms Nan said.
There are tax benefits
You can claim any expenses, depreciation and interest on the loan for your investment property as a tax deduction.
If you buy a property, live in it for six to 12 months, then rent it out, you don’t pay any capital gains tax on the growth in that investment for six years. This is sometimes called the ‘six-year rule’.
“If you don’t make it your [place of residence] and you haven’t lived in the property, then you will have [to pay] capital gains tax from day one of that investment property that you’re using for your rentvesting strategy,” Mr Harmon said.
If you decide not to live in the property before renting it and you sell it after owning it for at least a year, half of the growth in value of that property will be counted as a capital gain.
For example, if you make $200,000 on the sale of an investment property, then $100,000 would be added to your taxable income and taxed at your marginal tax rate.
Lack of control
Rentvesting means you have to deal with your tenants and are inconvenienced if your landlord sells their property and you have to move.