Will ‘rentvesting’ suit you?

Where you want to live and where you can afford to live don’t always make a perfect match. What if you love living in the inner city or near the beach or close to your work, yet you can’t afford to buy a property in these locations?

‘Rentvesting’ is a potential way around this dilemma. It’s the name given to a version of property ownership where you buy an investment home in an affordable suburb but pay rent and live in another suburb.

Rentvesting has given many young Australians a foothold in the property market. It provides the flexibility to keep living in an area you’ve grown accustomed, while using rental income to pay off your investment property.

It’s not for everyone, but it does offer young professionals and families an alternative way into the property market. Before jumping in, here are some of the issues to consider.

Tax swings and roundabouts

When it comes to taxation, there are both gains and losses from rentvesting.

An immediate benefit of owning a rental property is being able to claim tax deductions for related expenses. Body corporate fees, council rates, water charges, cleaning, insurance, maintenance and depreciation are some of the tax deductible expenses approved by the Australian Taxation Office (ATO).

Seek advice from a Quantity Surveyor and use a tax depreciation schedule to work out what it means in practice to claim deductions for ‘wear and tear’. Depreciation is a key benefit that can significantly improve your cash flow and reduce your taxable income.

Negative gearing is another plus for rentvesting. It means that even if your investment property is running at a loss – i.e., the rental income is less than the expenses incurred – it’s still possible to receive a tax benefit.

It’s when you come to sell your investment property that the news isn’t so rosy. Capital Gains Tax (CGT) kicks in when you sell at a profit. (This is in contrast to selling a home you live in, which has a CGT exemption). The CGT amount varies depending on how much profit is made, your income and how long you owned the property, but either way, expect the cost to be significant.

The responsibilities of a landlord

Dealing with tenants and maintenance is all part of the package of owning an investment property. Even if you have a property manager look after the day-to-day issues, you’re the one ultimately responsible for paying the bills and making the big decisions.

The restrictions of a tenant

Not being able to put a nail in the wall or keep a pet are common reasons people dislike renting. While some of us don’t mind living somewhere we don’t own, others crave the emotional connection of their own home.

To feel comfortable with rentvesting, ask yourself whether you can cope if the landlord asks you to move out, or if your requests for cosmetic changes are knocked back.

Costs add up

While your upfront costs may not be as high on a smaller mortgage, you still need to factor in costs like stamp duty and conveyancing.

You’ll need a buffer in case the rental income from your investment property doesn’t fully cover the home loan repayments. Without a strong cash flow and strict budget, you may find it difficult to keep up with rent, living expenses and topping up the home loan.

To get the most out of rentvesting, approach the purchase of your investment property with a clear strategy. You want your investment to deliver positive returns, so look for suburbs that have good long-term growth prospects and plenty of tenant appeal.

Decisions like how long you want to hold onto your property and whether you plan to invest again will impact your finance choices. Talk to your Yellow Brick Road mortgage broker about your plans and we can advise you on the best way forward.