With property prices exceeding the average wage increase in Melbourne, many people are struggling to buy their own home. While the great Australian dream of owning a home is still very real for many, people are taking different home-buying pathways to get their foot into the property market. One purchasing type that has been a growing trend is ‘rentvesting’.
What is rentvesting and what are the benefits?
Rentvesting is basically where you buy a home to lease out and rent a property where you prefer to live. This is popular among people who work in the Melbourne CBD but want to own a property in the suburbs. Property prices are quite expensive in close proximity to the city, hence why some young professional choose to rent close to the city and buy further out. While there are different views about renting as an investment strategy, rentvesting allows you to maintain the lifestyle you want now, while also starting your investment portfolio.
Some couples are also looking at ways to get their children into some of the best school areas. Properties situated in school zones are also often far more expense to other nearby homes located outside it. These couples are choosing to rent a property within the school zone so their children can attend, then later moving out to a home they purchased outside the school zone. If you want to learn more about property prices and school zones, please click here.
What are the risks?
The benefits are quite advantageous and can suit many people. However, there are a number of risks associated to this strategy. If for whatever reason, you stopped receiving regular rental payments for your investment property, could you afford to cover your loan repayments and rent? Another potential problem is interest rate movements. If interest rates increase, can you afford the increase loan payment? The property you are renting may also incur a rent increase if interest rates rise. It is critical that you review your budget and add some additional variables to ensure its affordable. A financial planner or accountant may be an ideal ally to support this process. Another issue to consider are the tax implications. There are some notable tax benefits as the property you are leasing out is an investment property. This may provide great tax benefits in the short term, but take careful note you may also be liable to pay tax when you sell the property (capital gains tax). Again, seeking advice from your accountant is essential.
Make sure you research the suburbs you are planning on rentvest. Once you implement the strategy, it is important to review your cash flow and investment plan regularly. As things can change in your personal life, these circumstances can also play a risk.
While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you want to learn more, please contact us. We welcome the opportunity to assist you.
June 2018
