Many say paying rent is like throwing money away but what about paying rent while earning rent?
As housing affordability continues to decline, purchasing in a centrally-located or sought-after area is often out of reach. Consequently, many are opting to rent rather than buy, particularly Millennials, as it means not having to compromise their lifestyle for home ownership. However, for those who are keen to enter the property market, there is a way to get the best of both worlds.
Rentvesting is an increasingly common phenomenon and refers to when you purchase a property for investment purposes in an affordable location and continue to live and rent in the area of your choice. It is a wealth creation strategy, particularly popular among the younger generation, which provides greater flexibility than being an owner-occupier. However, it is not just for the young, consider a typical family who may want to be in a particular school catchment or need to upsize due to a growing family or ageing children? If they were to move owner-occupied homes multiple times think of all that equity lost in the transaction costs – agent commissions, stamp duty, removalists, mortgage discharge and establishment fees.
With rentvesting, your rental income covers some or all of your mortgage interest expense, meaning you are likely to have a similar disposable income as before entering property ownership (if on interest only repayments). There will likely be a number of tax deductions claimable against your investment property however don’t get fixated on negative gearing. If you are paying tax, you are making money – so don’t avoid owning neutral or positively geared properties. Furthermore, on top of the standard expenses that come with home ownership (rates, maintenance etc.), there are potential additional costs to consider with owning an investment property such as higher interest rates (particularly for interest only repayments) and property management fees. Speak to your accountant or financial advisor regarding possible tax implications of rentvesting for your particular situation.
While rentvesting may appear ideal to many, it's not suited to everybody. To get the most out of this strategy, you've got to live within your means and be disciplined with your money. You must be comfortable with good debt and use surplus cash-flow to invest further or reduce your principal. Quite different to the Australian dream of purchasing your own home and living in it while paying it off as quickly as possible.
To further discuss this strategy and whether you have the means to make rentvesting work please get in touch.