In its truest form, the 'Great Australian Dream' postulates home ownership can lead to a better life and symbolises success and security. However, recent uncertainty in the property market along with inflation of rates and property prices have led the to a general belief that attaining the 'Great Australian Dream' has become more difficult.
While the Federal Government has introduced incentives to help first home buyers enter the property market, these are only for 'owner-occupied' transactions. Therefore, for homebuyers interested in property investment instead, ‘rentvesting’ has emerged in recent years as an alternative strategy to enter the property market.
Rentvesting is when homeowners live in a suburb that suits their budget and/or lifestyle while owning an investment property in a different area. The strategy is designed to give buyers the best of both worlds, since they can live somewhere best suited for them, while still being a homeowner. In the long run, this strategy could mean paying less in loan repayments while generating passive income.
There are two main types of buyers that may choose to rentvest.
One buyer spots their ‘Dream Home’ in a high-value suburb; however, the price is outside of their purchase budget. Instead, they may choose to rent a similar property within the area and use spare funds to invest into a property in a more affordable suburb.
Another buyer wants to continue living at home or in a share-house as it is more convenient and suitable for their lifestyle, but they want to quickly enter the property market.
Rentvesting is no easy decision to make, and numerous facets should be considered before making a final decision.
Enter the property market sooner: Numerous aspects such as income not being suitable (without rental income) or property prices being out of budget may hinder you from purchasing your ‘Dream Home’. However, the goal of rentvesting is to purchase a property more in-line with your homebuying budget, allowing you to enter the property market sooner while living somewhere that suits your needs.
Choose where to invest: As you would not be living in the property, lifestyle choices and preferences like distance from work need no consideration. Instead, think about a location that is stronger for investments in both rental yield and growth.
Borrowing power: If you are spending a low amount on rental costs or living with family, this could increase your borrowing capacity. Additionally, factoring in potential rental earnings (based on rental yield of the area) into your income may also help increase borrowing capacity.
Build wealth: Rather than holding out for the ‘perfect fit,’ entering the property market sooner and at a lower price point may help accumulate wealth, since rental earnings from your property could potentially cover the cost of your home loan and generate income.
Loss of Government incentives: Depending on how you enter the market and which state you live in, buying your first property for investment purposes may forfeit some very lucrative government incentives structured for ‘Owner-Occupied’ first home buyers. In Queensland for example, if you or your spouse have previously owned a property in Australia, you ma not qualify for the First Home Owners Grant (FHOG). Moreover, the First Home Loan Deposit Scheme (FHLDS) is not available for those purchasing an investment home as their first property, nor can this scheme be used once you have owned a property of any kind.
Interest rates: Banks tend to use higher interest rates on mortgages for investment properties as opposed to ‘owner-occupied’ loans.
Uncertainty: Renting a property holds a level of uncertainty and lack of control. The property landlord has all rights and control over the rental, and as a tenant, you could find yourself in a situation where you are at risk of being asked to move out on short notice etc.
Landlord costs: Owning a rental property carries many responsibilities and costs. As a landlord, you may need to pay a property manager to handle administrative duties relevant to your property, cover maintenance costs if property is damaged, and if rentvesting an apartment, pay for body corporate and strata expenses.
Emotional costs: While you may achieve the ‘Australian Dream’ through owning an investment property, there is an emotional cost associated with renting your dream home rather than owning it. Bound by rules and obligations of the landlord, you may be unable to make any alterations or changes to the property that truly makes the home your own.
So, what's better - rentvesting or owning your principle place of residence? The final decision comes down to whether you want to get your foot into the door of the property market, or if you want to buy your ‘Dream Home’, create memories, and tailor it to your ‘style’ without restrictions. Rentvesting compromises being a homeowner and renting your ‘Dream Home’, but ask yourself these questions before deciding:
How will this strategy financially impact you in the future? How likely is it to accumulate wealth and build your net worth?
Will your incomings (rental income and salary income) be high enough to cover all expenses (maintenance costs, utility bills, mortgage costs and other living expenses) to make a profit?
How will you approach the rentvesting strategy? Will you be living in a rental or living at home while owning an investment property?
It is important to speak with a professional to understand which homebuying scenario is best for you. Email us at firstname.lastname@example.org today if you have any questions, or book in an appointment to speak with one of our experts.