What Is Rentvesting?
So you have decided to invest in your own home, congrats!
For many, owning a home usually involves living in it. However there can be advantages to both renting and owning simultaneously. Sounds complex? Let’s break it down for you. While many people think rent money is money wasted, the concept of paying rent to a landlord each week may not be a terrible financial move after all.
What is this rentvesting concept we speak of? The rentvesting strategy means you can live where you want, in an area and home which suits your needs and own an investment property that fits financially.
Consider these two scenarios:
- You have bit the bullet and decided to purchase a property, paying down the mortgage from your own moola.
- Suppose you decide to use a rentvesting strategy and buy an investment property elsewhere and use the rent collected from your tenants to pay down your mortgage.
In each scenario you have decided to invest in your own home and are paying down your mortgage. The key difference lies in where the money for your mortgage repayment comes from.
In the second scenario you are paying money to a landlord however, you now have additional income to consider that the first scenario didn’t – rent from your tenant. You are rentvesting away that pesky mortgage.
There are a number of factors to consider if you’re looking to pursue this scenario (2) however. Like any important decision, it is good to create a Pros and Cons List. Here’s one we prepared earlier.
The Pros and Cons of Rentvesting
1. Living where you want
You have the flexibility to change locations, suburbs and experience living in an area that is desirable to you.
2. Flexibility with your budget
A mortgage is a large financial commitment that strains your household for a long period of time. The first 10 years are typically the most difficult. Renting gives you the possibility of adjusting your budget as you go.
Did you land that promotion? Way to go! You could upgrade to a boujee city slicker pad.
Saving for a trip to Europe? Perhaps you should downsize for 6 months? Flexibility is the big benefit here, and if you don’t mind change (and the joys of moving) then renting is a real option.
3. Tax deductions galore
Put simply, repayments on a principal place of residence are not deductible. However, interest repayments from an investment property are tax deductible. Great savings are on the horizon come tax time.
As current prices are driving many to make interest-only payments on their homes, the benefit of paying off your principal becomes redundant, making the fully deductible scenario the wiser choice.
4. Higher profit potential
You adore a particular suburb, but would you and should you invest there?
The average Joe may not know the growth projections of a suburb they’re hoping to live in and this may not be a priority. Regardless, your money is now in the market, so you might as well make the most of it.
While your choice suburb may be a great place to live, your money may be better invested in an area that is experiencing growth or may in the foreseeable future. By doing this you are more likely to build your wealth faster.
5. Save on entry and exit expenses
The cost of selling and purchasing a new property to live in costs approximately 8% of the home’s value in stamp duty, legal, and agency fees. Your property portfolio loses this amount each time you sell and move. With renting you can avoid this. The only major costs are removalists and bond fees. There can be disadvantages to rentvesting as well. Renting isn’t always a smooth experience of course.
1. It’s always temporary
Like it or not, you are at the mercy of the landlord and at the end of your lease period there is always a “what if?” What if my lease isn’t renewed, what if they sell the property? For some this uncertainty may not be a big deal, but for others who are emotionally connected to their living space, it can be stressful.
2. Limited personal touches
While there are some excellent rental wall-hanging solutions to display your favourite art pieces with minimal damage (click HERE for rental friendly hanging ideas.) I have friends who cringe at the thought of having to put a nail in the wall or worse… Having to store their collection in the garage or closet for the duration of their lease. Adding personal touches in regards to fixtures or fittings can prove near impossible if you are aiming for a full bond refund..
3. Less choice
This is often the case for premium-style properties where owners are more prevalent than renters. In this scenario, the home of your dreams just may not be available to rent. But then again, unless you’re in a buyer’s market, securing your dream home is hard at the best of times.
Urgh! – way to ruin a weekend, am I right? The dismantling furniture, bubble wrapping the fragile items and the complex game of boot tetris to reduce car trips, can be a bit much. While moving can be a burden, it does provide a good opportunity to Marie Kondo your life and declutter. I know I found Marie’s Guide to Moving exceptionally helpful!
Opting for a two-year lease period, if the owners agree to it, with yearly price adjustments, can be a good way to keep consistency and minimise packing and moving stresses.
We recommend doing some quick calculations for yourself. There are some excellent online property calculators available which provide insight into the Australian market. Crunch some numbers and calculate your property’s rental yield. Some have the ability to tell you how long it will take until you’re ‘better off’ buying.
When you decide to invest in the market, it’s only a matter of time before you’re ahead of the game. Rent money is dead money unless you are both renting AND investing at the same time.
The rentvesting strategy takes advantage of the fact that you can have your money invested in the property market at all times, thereby enhancing the benefits of being able to live a flexible lifestyle that is more affordable as well as supercharging the wealth. To continue your investment strategy, learning journey visit 9 Golden Rules To Property Investing