Property

The risks and rewards of rentvesting

If buying property is in your plans for 2018, rentvesting is one way to do it. Here's a look at the risks and rewards of the strategy.

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The new buzz word in property is rentvesting and that’s because it allows you to rent and buy. So you can effectively have your cake and eat it too… that said, getting burnt is still a risk.

Here’s what to consider.

So what is rentvesting?

With the median house price in New South Wales topping $1.1 million, and the median national house price costing around $819,000, it’s no wonder many people are rethinking their approach to property investment, leading to a rise in rentvesting.

Rentvesting is when someone buys an investment property in an area where they can afford to buy, while renting a home somewhere they actually want to live but can’t afford to buy.

The rent collected from the tenants of the investment property then helps to pay the mortgage over that property.

Later, the investment property could become a stepping stone and be sold to help the owner buy a home in a more ideal location.

Risks and rewards of rentvesting

It might sound very appealing, but before jumping into rentvesting it’s important to understand the risks and rewards associated with buying an investment property.

Rewards:

  • Location: Rentvesting offers the opportunity to live in a location you like, while buying into the property market in a location you can afford.
  • Flexibility: Renting a home means you can try living in different types of homes and neighbourhoods.
  • Spare income (potentially): Because the rent from your tenants is ideally paying all of your monthly mortgage repayment for your investment property, you may potentially have spare income for things like extra mortgage repayments or to save for holidays.
  • Tax deductions: There are currently some tax deductions available to property investors for expenses on that property such as home insurance, water and council rates, agent fees and commissions, pest control, and repairs and maintenance. Check the ATO website for details.
  • Enter property market sooner: Buying an investment property in a cheaper suburb can allow you to break into the property market sooner and with a smaller deposit than if you wanted to buy in the suburb where you rent.

Risks:

  • Property management: Rentvestors, like any other property investors, have to manage their property, buy landlord insurance and do maintenance.
  • Temporary: Because tenancy agreements in Australia are temporary (e.g. 12 month leases), you don’t always get to personalise the home where you rent and you may experience vacancy gaps in your rental income when your investment property is between tenants.
  • Rental prices may fall: If rental prices fall, your investment property may not always be “paying for itself” with enough rent to cover your mortgage repayments.
  • First Home Owners Grant: If you’re entering the property market through rentvesting, you’re not eligible for the FHOG.

With any big financial decision like buying property it’s important to do extensive research. If you think the rewards outweigh the risks, then get some professional financial advice about whether rentvesting is for you!

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