With the property market out of reach for many due to rising interest rates and high property prices, Australians are looking for alternative ways to enter the market.Rather than taking out a huge mortgage to purchase their dream home in their desired location, many are turning to ‘rentvesting’, a process by which an investor purchases a house or apartment to rent out while they continue to live in their preferred area or dwelling type.
This way, they have a foothold in Australia’s property market, but they continue to rent and live in area they prefer. It’s a trend that is becoming more and more popular among Australian households, with around 15% of tenants in Australia now rentvestors according to the Australian Bureau of Statistics (ABS).
What Is Rentvesting?
Rentvesting is a property purchasing strategy that is usually specific to residential property. Rentvesting is a lexical blend of ‘rent’ and ‘investing’, whereby a person purchases a property in one location with the intention of leasing it to another person, while simultaneously renting another property in which they would reside.
Example
As an example, Jane may have a budget enabling her to purchase a property but that location may not suit her lifestyle or work needs, so she takes a lease on a property in a suburb in which she lives and which is more suitable to her locational requirements.”
With the property market out of reach for many in capital cities, including Sydney and Melbourne, as well as key regional centres, rentvesting provides the opportunity to invest in the (mostly) lucrative Australian property market without breaking the bank. Ultimately, it means those who are rentvesting (being Jane in the example above) receive the benefits of owning a rental property—such as exposure to any capital growth and any income tax offsets—while simultaneously paying rent to occupy a property in a location more suitable to their needs.
Rentvesting is a worthy endeavour for those with a suitable risk appetite and a budget that accommodates some unexpected maintenance costs, higher interest rates on a mortgage, or rental vacancy in their owned property.
It is certainly a legitimate strategy worth considering as it enables the person to live in a location suitable to them while owning a property which brings concomitant exposure to any capital gains (or losses) and any income tax offsets.
Benefits Of Rentvesting
There are many benefits to rentvesting. As mentioned above, it ultimately means the purchaser can enjoy the benefits of home ownership without the location or budget constraints.
This doesn’t necessarily mean that the investor seeks a less expensive property to acquire as that investor may instead have identified a location which [they] believe may deliver a higher capital growth or rental yield than might be available in a location that suits [their] lifestyle requirements.
As a tenant, the occupant is typically not responsible for maintenance costs, however conversely, the investor is responsible for the equivalent maintenance costs of their owned property.
Are there tax benefits to rentvesting?
Yes, there are tax benefits to rentvesting. Wist says that the income from the owned residential property which is leased to another person may attract negative gearing benefits enabling some income offsets to lower income tax. There are other tax benefits, too. Since rentvestors generate income through rent, they can vary through tax deductions such as maintenance costs, mortgage interest and property management fees, which are deductions generally unavailable to owner-occupied properties.
What Are The Risks Of Rentvesting?
Like all investments, there are risks to rentvesting as well.If the owned property becomes vacant for whatever reason, the investor remains responsible for any mortgage payments and other ownership-related costs (rates, insurance etc) on top of the rental obligations for their other occupied rented property.
This may become financially problematic as they may have to pay both rent on their occupied property and the interest on the mortgage and other related costs on the owned property.
There are also the conventional risks with owning and leasing out a property to other occupants. As with any rented accommodation, security of tenure is limited beyond the maturity of the lease period. If you struggle to find a new tenant, you’ll be stuck paying your own rent of your current lease without the added income from your rental property.
Is Rentvesting a Safer Investment?
An investment property typically guarantees rental income–on the premise that you can rent it out in order to receive that income. At the moment, rental vacancies are at an all-time low so finding tenants is easy, but this, of course, may change in the future. There’s also no guarantee that you’ll be able to cover mortgage repayments with the amount that you receive from your rental income (known as negative gearing).
Real estate company LJ Hooker says the trick to rentvesting is that you must invest the difference between your own rental costs and your rental income for this wealth strategy to work.
Ultimately, it’s important to consider all the pros and cons of rentvesting before purchasing a property as a rentvestor, especially due to the changing nature of the Australian property market.
How can we help?
If you have any questions or would like further information or you are seeking property tax advice, please feel free to contact our office via email –info@investplusaccounting.com.au or phone 02 9299 7000 to either speak with someone or arrange a time for a meeting so we can discuss your requirements in more detail. You can arrange a free 15 minute no obligation chat to discuss your options. Please arrange an appointment with our office by clicking here
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