Rentvesting in Western Australia: Everything You Need to Know
Are you looking to enter the property market?
If you’re renting in an area that you want to continue to live in but buying a property in that area is out of your financial reach at the moment, you may still have an opportunity to enter the property market.
Let us introduce you to rentvesting. What is it, and is it the right investment option for you? With this detailed guide, you can decide for yourself.
What Is Rentvesting?
Rentvesting is a homeowning strategy where you rent a property in an area you want to live in and buy an investment property in a suburb you can afford.
The idea behind the rent and invest strategy is that you can pay rent rather than mortgage repayments for a property in an area that suits your lifestyle and use your remaining funds to buy another property (typically in rural or regional areas) that suits your budget and that you can rent out.
Rentvesting can get you started with gaining equity and set you on the path to owning your home in the future. Of course, this strategy only works if you invest the spare funds you earn every month.
For example, you may buy a home in your dream area and pay $4,000 monthly for mortgage repayments. However, renting in the same area would cost you $2,000 a month, which leaves you with $2,000 to invest!
Who Is Best Suited for Rentvesting?
Rentvesting accommodates investors of various income points. We will elaborate on who should and should not rentvest to help you determine if this investment property journey suits you.
Who Rentvesting Is For
The rentvesting strategy is most rewarding if you intend to live in an area where there’s a significant price difference between rent payments and mortgage repayments.
Generally, we recommend rentvesting for people who are looking to make a long-term property investment. Usually, the value of an investment property increases, and investors can move into their dream homes in over ten years.
Do you want to live in areas with higher property values? Perhaps you have kids and want them to attend a specific school, or you want to reside closer to family or work. Or, you might be a single parent, so you run a single-income household but still want to invest. The rentvesting strategy takes into account the hefty property prices in those areas.
Also, anyone who prioritises a certain urban lifestyle can benefit from rentvesting, which is why younger investors often take that route. Many of them can’t afford properties in locations they want but still want to get on the property ladder. That’s why rentvesting is a sweet spot for them, providing the best of both worlds.
Last but not least, this strategy is suitable for those who travel for long periods or extensively for work.
Who Rentvesting Is Not For
Buying an investment property and living in a rental property isn’t for everyone. If the mortgage and rental prices of the property in question are almost in the same range, this strategy won’t be very helpful.
Another scenario where you shouldn’t rentvest is if it’s financially straining for your personal circumstances.
Simply renting may be a waste of money, and the market value of an investment property may be lower than that of your dream home. Nonetheless, these aren’t reason enough not to be realistic about your financial ability.
What Are the Benefits of Rentvesting?
When you rentvest, some advantages you can expect include:
Enjoying a Certain lifestyle
Do you dream of living in a house closer to the city? Perhaps you want a neighbourhood that’s safe, has good schools, or is close to lifestyle amenities, employment opportunities, beaches, cafes, parks, friends, family, or else. For many first-time property buyers, owning property in such locations is out of reach.
One of the main benefits of rentvesting is enjoying the lifestyle you want, while climbing the property ladder.
Ability to Enter the Property Market Sooner
When you buy a property in one of the more affordable areas, you may only pay a deposit that is more within reach.
This would mean, you can become a property owner sooner than you would if you were to wait until you could afford a home in your dream neighbourhood.
You also have the time to see capital growth as your property’s value increases.
If you rentvest, you can significantly save on mortgage repayments and infuse that money into an investment property or several ones. By generating positive cash flow, you can build your property portfolio and future wealth and eventually buy your dream home.
After all, mortgage repayments will be relatively smaller amounts, and buying an investment property will make you an income that can help with your mortgage or your rental costs. Also, the rent money can help you cover ongoing home ownership costs.
Finally, you may have the opportunity to sell your rental property for a profit if its value increases over time.
As a tenant, you do not have to pay Lenders’ Mortgage insurance or worry about upkeep and maintenance costs (resulting from wear and tear), utility services, council, stamp duty, corporate fees (depending on your lease terms), and other upfront costs.
Flexibility From Not Being Tied to a Location
If you want flexibility, rentvesting gives you the option to move from one area to another, travel, and live in different property types since you’re only renting. You can upgrade or downgrade at any time to suit changes in your circumstances without worrying about legal costs and stamp duty expenses.
No Property Investment Location Restraints
You can buy an investment property anywhere without thinking of lifestyle needs. Your only concern should be the potential for capital growth and your current buying ability. For instance, the property can be in a different city!
Finally, you can claim tax deductions to improve your cashflow post-tax. Various expenses you pay for your investment property are tax deductible, including repairs, improvements, property manager fees, stamp duty, lending fees, holding costs, depreciation costs, interest charged for an investment property loan, insurance costs, advertising expenses, and more.
If the value of the investment property decreases over time or the cost of keeping the property is higher than your income from leasing it out, you can claim these losses. This tax deduction is handy when you can’t afford dishwasher or washing machine maintenance costs.
What Are the Disadvantages of Rentvesting?
However, rentvesting may present its own set of challenges which are important for you to be aware of. Here are some of the common ones.
Costs of Renting and Owning at the Same Time
The idea that “rent money is dead money” makes people hesitate to live on a rented property. However, it’s only dead money if you don’t invest your spare funds in a property investment.
On another note, you have your home ownership costs to worry about, such as maintenance and repair costs and leasing agent fees. Not to mention, you might need to hire a leasing agent, and you have to account for potential property vacancies, which can leave you without rental income for a while.
If your property ownership costs are higher than your rental income, you’ll need to pay the difference along with your rental costs. However, tax deductions can take the edge off these expenses.
To counter this issue, your investment property should have a deposit of under 20%, and the rental yield (difference between the rental income and costs of investment) should be sensible.
Working with a smart mortgage broker can help you choose a rental property that matches these requirements and accommodates your finances. Also, consider hiring a property manager. By lowering your vacancy rate, they can maximise your property returns.
Potential Inability to Access Homeowner Grants
Owning an investment property can affect your first home owner grant eligibility.
If you buy a home in the future, you may not receive first-home buyer benefits because you already own a property.
Making an informed decision will need to include understanding what impact rentvesting has on your eligibility to first-home buyer benefits.
Paying Tax on Capital Gains
Do you plan on selling your rental property in the future? You may have to forego some of your profit because of the Capital Gains Tax Liability.
Whether you pay Capital Gains Tax or not depends on your capital gain/loss. To illustrate, you should subtract the costs of buying a property and making renovations from the amount you receive on selling it.
Making a net capital gain in the income year means you’ll have to pay tax. In that sense, a successful investment property that grows in value involves paying tax.
Otherwise, suffering a net capital loss means you carry it forward into the following years and subtract them from their capital gains.
To compare, your main residence comes with a full exemption of any capital gains tax liability if you choose to sell it.
Continuing to Live in a Rental Property and Not Moving Into the House You Own
Renting a property rather than living in the one you own comes with a lack of control, uncertainty, and security since it involves inspections and rent raises.
Additionally, your landlord can decide at some point that they want to raise the rent or make other changes, which may not be desirable for you as a tenant. Meanwhile, you’ll be unable to make many changes yourself, so it may not feel like your own home.
Even worse, the landlord might decide to sell their investment property or change tenants and ask you to leave it.
For that reason, one of the cons of rentvesting is that you might have to move houses several times, and you need to be fine with that.
Landlord and Tenant Problems
As both landlords and tenants, property investors may have to face problems with their tenants, landlords, and property managers simultaneously. Imagine contacting your property management to fix a leaking tap while handling a problematic tenant on your commercial property.
One of the cons of rentvesting and living in rental properties is that it can be emotionally taxing.
Rentvesting means taking a different path from what was traditionally considered the ‘Great Australian Dream’. This can be challenging for some people.
What Do You Need to Consider?
To make the decision easier for you, here are the factors you need to consider before choosing to rentvest.
Rent Where You Want to Live and Invest for Growth And/Or Cashflow
You need to make a strong rental income for rentvesting to be financially sensible.
Research rent prices where you want to live and compare them to rent prices where you want to buy a property. Your investment property should generate a solid monthly income compared to the rent you’re paying. Otherwise, it may not be worth it.
The investment should also have a property value increase over time. It’s not enough to buy property somewhere cheap; you want a location in a city that’s undervalued (not of poor value, just undervalued). A buyer’s agent or property advisor can help you make a smart property purchase.
Getting the Right/Strong Rental Outcomes to Make It Worthwhile
Other than finances, there should be enough positive outcomes to rentvesting to make it worthwhile. For one, rentvesting can help you enter the property market sooner, benefiting from rising property prices.
Also, if you’re unable to buy a home in a desirable location, rentvesting allows you to live there. This way, you can enjoy the lifestyle you dream of. Also, if you change job locations constantly or you’re a freelancer, the flexibility of rentvesting will be a solid perk, as you don’t have to be tied down to a location.
Leasing Your Property
Ideally, you want to rent out your investment property before you move into the new rental property to avoid paying rent and mortgage without rental income. Implementing a leasing strategy concurrent to your purchase is crucial.
Part of property management is ensuring your property meets compliance requirements before renting it out, which are landlord obligations set by State Government. That may entail conducting proactive repairs and maintenance measures.
Rentvesting vs Buying to Live: What Is Better?
Everyone is unique with personal lifestyle and financial goals.
You should consider the benefits of both strategies to make your choice on rentvesting vs buying to live.
On one hand, buying a home to live in tends to be cheaper overall than rentvesting.
Also, since you live in your property, it provides you with a sense of stability that a rented property doesn’t. Additionally, you can make cosmetic improvements without seeking permission and don’t have to worry about rental inspections. There’s also the state of comfort that comes with living within your means.
Buying a property to live in is the way to go for anyone who can afford to buy their dream home. If that’s the case, your investment strategy may be better to get your primary residence, build equity, and get an investment property in that order.
On the other hand, buying a home in the location you want (such as areas closer to the CBD) can be costly compared to renting there. By rentvesting, you can live in a good neighbourhood and buy an investment property in a different and more affordable area.
The investment property can help you build rental income and increase your capital growth. This way, you can sell the property or use the equity in your investment property after its value has increased and buy another in a desirable location.
Getting the Most Out of Rentvesting
Now, let’s discuss two tactics to help you save on rent as you make payments for your investment property.
The Benefits of Rentvesting While Living in a Sharehouse
Do you want to make as much profit rentvesting as possible? Consider living in a share house.
This arrangement involves several people living on the same property. They typically have separate bedrooms but share facilities (kitchens and dining rooms).
Since you split rental costs with other tenants, you’re left with more money to invest.
Many young investors lean towards rentvesting, which makes house-sharing a good idea. After all, it’s one step closer to independence and a way to enter the property market faster. Eventually, you’ll move out of the share house and into your own place. Then, you’ll be in a strong financial position with a good investment portfolio.
The Benefits of Rentvesting While Living in a Family Home
This is quite a controversial idea, as living in your family home can seem like a setback for some.
However, this strategy enables young investors to own property sooner. After all, they cut expenses on rent, utilities, and more. Even if their parents expect them to contribute financially, it’s usually not as financially impacting as living alone.
How Do You Decide What Is Best for You?
With both rentvesting and buying have their distinct advantages, it can be difficult to determine the right strategy – so seeking professional advice can be the best route to take if you can’t seem to make up your mind.
By speaking with a property agent such as our team at HERE Property, you can get the help you need to secure your dream home and achieve your personal lifestyle goals.
Contact HERE today!
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