Rentvesting

What Is Rentvesting, and How Does It Work?

Rentvesting is a property investment strategy where you purchase an investment property while continuing to rent a home in a location that suits your needs. This approach could provide you with an opportunity to enter the property market without being restricted by affordability challenges in high-priced suburbs. 

Suppose you’re a homeowner in Sydney who wants to live near the central business district (CBD) for work and lifestyle benefits but finds purchasing a property there financially challenging. Instead, you could buy an investment property in a regional or outer suburban area with strong rental demand while continuing to rent closer to the city. This way, you can gain a foothold in the property market, potentially benefit from rental income and capital growth, and still enjoy the flexibility of renting in a preferred location.

What Are the Advantages of Rentvesting?

Here are some potential benefits of rentvesting that could make it an attractive option:

Freedom to Live in Your Preferred Location

With rentvesting, instead of committing to a large mortgage to buy a home in a high-cost city, you could rent a home in your ideal area while owning property in a more affordable market. This approach may enable you to balance lifestyle choices with investment potential, offering access to better amenities, career opportunities, and social benefits while still building equity in an investment property and potentially benefiting from capital growth.

Relocation Flexibility

Renting your primary residence may offer flexibility that traditional homeownership does not. If you need to relocate for work or lifestyle changes, you can potentially do so without the financial and logistical burden of selling a home. This freedom might be particularly beneficial if you anticipate career moves or changing personal circumstances.

Early Entry into the Property Market

Rather than waiting years to save for a home in an expensive location, rentvesting could allow you to enter the market sooner by purchasing in a more affordable area. This means you may have the opportunity to benefit from potential capital growth and rental income, depending on market conditions. This strategy could also provide flexibility to adjust your investment approach if property values rise while still allowing you to upgrade in the future. You might consider using a rentvesting calculator to estimate costs and potential returns, helping you assess whether this approach aligns with your financial goals.

Potential for Rental Income and Capital Growth

An investment property may generate rental income, which could help offset mortgage repayments and other costs. It also has the potential to appreciate in value, generating capital gains depending on market conditions. This combination of rental returns and long-term property appreciation could make rentvesting a viable wealth-building strategy for some investors.

Tax Advantages

Owning an investment property may allow you to claim various tax deductions, including mortgage interest, property management fees, and maintenance costs. Negative gearing could also reduce your taxable income if the expenses exceed rental earnings. These financial incentives might make rentvesting an attractive option if you’re an investor looking to optimise returns.

What Are the Risks Associated with Rentvesting?

While rentvesting has potential advantages, there are important risks and considerations you should evaluate before proceeding with this strategy to ensure it aligns with your financial stability, investment goals, and long-term lifestyle plans.

Managing Two Financial Commitments

As a rentvestor, you will need to cover both your rent and your mortgage repayments, which would require careful budgeting. If your investment property remains vacant for an extended period, you may struggle to meet these obligations. It’s essential to have a financial buffer to cover unexpected costs and help maintain financial stability.

Capital Gains Tax (CGT) Liabilities

Unlike owner-occupied homes, investment properties are typically subject to Capital Gains Tax (CGT) when sold. If your property has appreciated in value, CGT may apply, which could reduce your overall profit.

However, certain exemptions or concessions – such as the six-year rule – might allow you to reduce or eliminate CGT, depending on your eligibility. Under the six-year rule, if you initially lived in the property as your main residence before renting it out, you may be eligible for an exemption from CGT for up to six years, provided you do not treat another property as your main residence during this period.

Ineligibility for First Home Owner Grants (FHOG)

First-time home buyers in Australia may be eligible for government grants and stamp duty concessions when purchasing a property to live in. However, since rentvestors buy property for investment purposes, they are typically ineligible for these benefits. This means you could need a larger deposit and might want to weigh the loss of grants against the possible financial gains of rentvesting.

Market Risks and Property Maintenance Costs

Like any investment, property values can fluctuate, which may impact capital growth. If market conditions decline, your investment might not appreciate as expected, or you may need to sell at a loss. Additionally, as a landlord, you will be responsible for maintenance, council rates, and property management fees, which may impact overall profitability. 

Is Rentvesting the Right Strategy for You?

Rentvesting is not a one-size-fits-all solution, and its success depends on your financial situation and long-term goals. It may be worth considering for young professionals, investors, and those seeking lifestyle flexibility. However, if homeownership stability and personalisation are priorities for you, buying to live in could be a better option. Carefully assessing your financial capacity, risk tolerance, and investment objectives could help you determine whether rentvesting suits your plans.

How Can a Mortgage Broker Help With Rentvesting?

A mortgage broker could provide expert guidance to help you handle the rentvesting process. Below are some key ways a broker might assist in making the most of this strategy:

• Loan Structuring: Brokers could help tailor your mortgage to align with your financial goals, including offset accounts and interest-only loans for investment properties.
• Access to Competitive Rates: Brokers generally have access to a wide range of lenders, which may allow them to find loan products with favourable terms for rentvestors.
• Risk Management Planning: Brokers could assist you in evaluating potential risks, such as interest rate rises and rental vacancies, and help adjust your strategy accordingly.
• Investment Tax Strategies: Understanding tax deductions, negative gearing, and CGT implications is important for profitability. A mortgage broker may connect you with financial experts to help optimise your tax benefits.

Exploring Rentvesting with Ausfirst Lending

At Ausfirst Lending, we specialise in helping rentvestors find investment loan options that may align with their financial goals. Our mortgage specialists offer expert guidance on loan structures, lender choices, and risk management strategies to help you make informed decisions.

Whether you’re getting started with rentvesting or looking to grow your investment portfolio, we’re here to help you explore loan solutions tailored to your needs. Contact us today to discuss your options and take the next step in your property investment journey.

Why Choose Ausfirst Lending Group

Dedicated Guidance and Comprehensive Service

At Ausfirst Lending Group, you are our top priority. We are dedicated to providing comprehensive assistance from start to finish, not just because we are legally obligated to act in your favour, but because we genuinely want to ensure your success. 

We focus on your objectives and requirements, and combine deep industry knowledge with a strong commitment to finding loan options that truly align with your financial needs. We simplify the entire loan application process by assessing your borrowing capacity, organising documentation, and negotiating terms on your behalf, all while securing the most favourable outcomes for you.

Extensive Lender Options

One of the key benefits of working with Ausfirst Lending is our access to a diverse range of lenders. Instead of presenting just one option, we assess a broad array of options according to your financial needs. This allows us to tailor solutions that match your specific goals and circumstances, ensuring you get the best possible outcome.