Imagine owning a new home in a suburb you can afford, but living a lifestyle of your dreams. A new way of purchasing property has taken over the market in recent years, and is especially popular with Gen Y buyers and those in capital cities.
Rentvesting is the practice of buying a property is a low-cost suburb, one predicted to climb, while still renting in a more popular suburb outside of your purchasing budget.
The rent of your purchased property should cover the mortgage, while you continue to enjoy living in your dream suburb.
Many buyers have gone on to do so with more than one property with a long-term goal of eventually trading up to the more expensive suburb. The idea is to find a suburb that offers a rental return of 5% or more, or search for an area with even higher returns.
With many Sydney and Melbourne suburbs pricing first time buyers out of the market, many are choosing to rentvest as it is more affordable to rent in a high end home, rather than purchase one.
While rentvesting has its clear positives, there are some aspects that have buyers wary. The benefits attracting buyers include:
- Making a smart decision. When purchasing to invest rather than live buyers tend to make better choices as emotion is removed from the equation.
- A lower financial investment or risk. Because the idea is to look to low cost suburbs, the amount borrowed is within your budget allowing you less pressure.
- Rentvesting means you have to save for a smaller deposit and potentially enter the property market sooner.
- Allows you to build equity in your property portfolio, with a long-term goal in mind
- You can move and travel with ease as your property is not dependant on you.
The downside to rentvesting can include:
- The costs associated to being a landlord. There are countless horror stories of tenants damaging properties and leaving the landlords to cover the costs, as well as the ongoing maintenance costs of owning a rental property.
- When you eventually sell your investment property you will have to pay capital gains tax on the sale unless it is your principal place of residence for a period of time beforehand.
- Although you own a home, you are still living in a rental which means you have to abide by the rental rules. The dream of having your own home comes with an array of ideas such as painting rooms, hanging pictures, growing gardens, and having pets – all of which will have to wait while you rent.
- The rent may not cover the repayments. The market can shift, and interest rates can rise, so be prepared to cover the gap should once come.