WHAT IS RENTVESTING?

HOW RENTVESTING WORKS

The rent and invest strategy is to buy an investment property first (where you can afford to buy) and rent where you want to live (can't afford to buy.)

It’s a tactic that overcomes financial obstacles and prohibitive prices, because you can buy in a location that fits your budget and then rent in a location that suits your lifestyle.

It works because even though you’re renting, the property you buy is an asset that’s growing in value and being (in part) paid off by a tenant.

Furthermore, you’re gaining equity that can propel you into other property purchases down the track and when the time is right, a home to call your own in the location you want to live.

Rentvesting is a particularly useful strategy for those who want to live in more expensive suburbs. Inner Melbourne is a booming economic hub that commands high prices due to land-locked supply and increasing demand from the many people who like the lifestyle and amenity.

As such, many white-collar workers – particularly Millennials who make up a high proportion of middle-income employees – face few choices if the inner suburbs are too costly.

They can buy in a less expensive outer fringe suburb and live with a horrible commute, or they can rent closer in.

Rentvesting is the one time that low yields work in the investor’s favour.

The Melbourne City rental market hasn't yet caught up with accelerated prices.

For example, while the median price for an house in Melbourne is in the high $700,000s, the yield is only around 3.5%.

With a rentvesting strategy, you would buy your investment property in a high capital growth area further from the city, and you'd be able to take advantage of the lower asking rents in the city.

For example, let’s say you wanted to buy a house in a middle-range Melbourne suburb, where the average home is $800,000.

Assuming a 20% deposit ( $160,000) and a 5% interest rate, the mortgage repayments would be around $880 per week (principal and interest). The average rent for a house in the same market is only $500.

THE PRO'S

• Rentvesting gets you into property sooner. When you buy property for wealth creation, you should ideally focus on capital growth. Capital growth needs time to work effectively, which means that buying today – rather than 5 or 10 years from now while you wait to accumulate a deposit or grow your income – is an essential step to successfully growing your future wealth.

• You can choose a financial structure that allows for a smaller deposit (less than 20%). If properly structured, a smaller deposit for an investment loan is still a feasible tactic as long as the mortgage is offset by the rental income. A knowledgeable mortgage broker can help you calculate your minimum deposit requirements in line with your financial situation.

• You can choose an investment property within your budget, without location constraints. Your investment property doesn’t have to be in the same neighbourhood as you. Before you buy, you should create a plan based on long-term goals, and then find a property that fits in with your strategy.

• You can live in a location you can’t afford to buy, and have the flexibility to move or upsize/downsize. The advantage of renting is the flexibility to move without significant expense, which can be beneficial to those who move around for work, or when personal circumstances change.

• Tax deductions from the investment property help to offset the mortgage repayments. Most expenses related to your investment property will be tax deductible, including improvements and repairs you make along the way. At the end of the financial year, these deductions will help to cover the costs of managing your asset.

• Without a huge mortgage to pay, you can save for your own home or next investment. Earlier, I gave an example of the difference between buying a middle-range Melbourne home and renting. In the example, it cost $350 less per week to rent than to buy. If circumstances allow, rentvesting can create more margin in your finances so you can put money aside – and all the while, your investment property is growing in value and being paid down by your tenant.

THE CON'S

• You’re still renting. This is a sticking point for some people, who can’t shake the feeling that rent money is dead money, or who would like the freedom to personalise their own home.

• You don’t have the security of owning your own home. It’s not easy being at the mercy of a landlord.

• You may miss out on the first homebuyers grant.

• You may have to pay capital gains tax when you sell. Capital gains tax can be a hefty levy if your property has done its job and grown significantly in value.

FINANCING THE INVESTMENT

In terms of finances, there’s a world of difference between an investment property and a principal place of residence.

Investments offer additional benefits that can give you a significant leg-up with lenders, and affording the mortgage.

It adds to your cashflow. Your investment property offers a lot of tax breaks, year after year. There’s depreciation, deductible expenses like interest, rates, repairs, management fees, and the negatively geared portion of your mortgage repayments. These extra financial benefits can help lenders look more favourably on your application, and offset the mortgage repayments.

When you’re buying an investment property, location is only based on capital growth prospects. An investment property gives you freedom to find a location that fits your budget and your strategy.

IS IT RIGHT FOR YOU?

Wealth creation through property is about growing a substantial asset base by owning properties that grow in value over time and provide rental returns.

If you’re not sure rentvesting is for you, you’ll need to weigh up all your options.

A savvy mortgage broker can help you determine your safe borrowing capacity.

Rentvesting has advantages and disadvantages, but it’s up to you to decide whether it’s a suitable fit for your circumstances. If you do choose to invest first, you’ll be joining the growing army of rentvestors who are delaying the ‘great Australian dream’ in their quest to secure a wealthy, financially free future.