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What is Rentvesting?

Posted 28 Dec by

Neutral Bay resident, Greg asks

“I currently live on Sydney’s North Shore, and love the lifestyle but can’t afford property here. I’ve heard of the term rentvesting as an option. What is rentvesting and how does it work?

Great question Greg. As property prices continue to rise, we’re seeing more and more people,  especially younger people, take advantage of this as an option. Here’s some advice about rentvesting, along with how it works.

Rentvesting is basically where you might rent in an area that you want to live in, instead of buying there, whilst putting your money towards an investment property in an area that is more affordable.

Rentvesting has become a popular term in recent times within Sydney in particular, due to the cost of housing. With median prices hovering around the million dollar mark, it’s become quite expensive to buy property.

For example, if you were to buy a million dollar property in Sydney and you had a 20% deposit and borrowed $800,000 at 4% per annum over a 30 year loan term, your monthly loan repayment would be $3,819.

You could potentially rent a similar house in the same area for roughly $700 per week, which equates to $3,033 a month. That extra $800.00 a month can be put towards an investment property within a much cheaper area.

Whilst renting might seem counterintuitive, there are a number of advantages of doing this –

  • The initial deposit required in a cheaper area will be considerably less
  • A lower loan amount will be required on the cheaper investment property purchase. So you will have less debt.
  • Monthly repayments will be much lower

Advantages of rentvesting

What we’ve seen recently are people living in Sydney, whilst investing interstate in areas such as Brisbane or other regions where there’s more potential for capital growth with higher rental yields. Obviously, loan repayments in these areas are considerably lower also.

For many, having to save the initial deposit can be a challenge. This in itself can influence the decision of many buyers who chose to continue renting, whilst purchasing an investment property elsewhere.

For example, whilst there are still many lenders that accommodate 90% home loans, for a young couple that only have say, $100,000 in savings, who are wanting to purchase a million dollar property, it’s likely that they’ll incur mortgage insurance.

Whereas if they continued to rent, and purchased more affordable property elsewhere, they could potentially avoid having to pay mortgage insurance.

Another factor that many may not be aware of are the tax benefits involved with rentvesting. Interest for an owner occupied loan isn’t tax deductible, whereas interest on an investment loan is. Obviously seek the advice of your accountant on this.

Rentvesting in a way is very similar to younger people buying property whilst still living at home. Infact, it’s quite common amongst younger people who decide to purchase an investment property, rather than an owner occupied property whilst still living with their parents, simply because their living expenses are quite minimal.

Disadvantages of rentvesting

For some, rentvesting works and it works well, however there are some downsides.

One potential downside is that if you purchase a property for investment purposes which won’t be your principle place of residence, you won’t be eligible for first home buyers grant or stamp duty exemptions and concessions. Of course first home buyer benefits are only available where the purchase price is well below Sydney’s median house pricing anyway, but it’s still worth noting.

Another potential downside can be the uncertainty of your residential status. Unlike buying, when you rent there’s always that potential where you’re forced to move out of the property. For example, if the owner or the landlord decides to carry out extensive renovations, sell or on occasion the landlord may move into the property themselves.

Not always a downside, but it’s worth mentioning – capital gains tax. Capital gains tax implications can also come into play if ever you decide to sell the investment property at a later stage.

If there’s capital gain on the property, then that some of that gain is taxable upon sale, whereas if you buy an owner occupied property and sell that down the track then that’s exempt from capital gains tax. Always seek the advice of an accountant on tax matters such as Capital Gains Tax.

Disclaimer
The information on this website was correct at the time of writing but lender policies are subject to frequent changes. It is for general information purposes only.Whilst we endeavour to keep the information up to date and correct we make no representations or warranty that the information is current and take no responsibility for any loss or inconvenience caused by a person or organisation relying on this information. We recommend you contact us before acting upon any of this information.