Rentvesting: Getting a foot on the property ladder

“The worst thing about home hunting? I see lots of places I can afford, and lots that I would want to live in… but never both together.”

This statement rings true for many first home buyers.

Do you know someone who it try to get their foot in the Australian housing market door?  This may be helpful for them...

Opportunities may be around the corner, especially if you’re prepared to look at an inner city apartment in Melbourne, Brisbane, or parts of Sydney with lots (and lots) of new apartments expected to be completed in the short term.

But what if you don’t want to live in one of those areas? In fact, what if you wouldn’t want to live anywhere you can afford to buy? Perhaps you should think about “rentvesting”: instead of buying the property you want to live in, you rent a home and then invest the leftover money elsewhere.

Why would that work? Because rental yields are usually lower than the cost of servicing a mortgage. (That’s why negative gearing works.)

So what are the pros and cons of Rentvesting?

The Pros:

  1. You could break into the property market sooner with a smaller deposit.
  2. You may be able to live in a better home than you can afford to buy.
  3. You could start building your investment property portfolio, now.
  4. You could easily upgrade or downgrade or move around (even travel the world), with no stamp duty expenses or legal costs.
  5. You could claim interest payments and maintenance costs on your investment property as a tax deduction.
  6. It would allow you to be ruthlessly objective when it comes to choosing an investment.

The Cons:

  1. You may be required to move out whether you want to or not.
  2. Want to freshen up a room with a coat of paint? Hang some pictures? Replace the carpets? It wouldn’t be sensible to spend too much and you can’t make any improvements without permission from the landlord.
  3. You would pay capital gains tax on your profit when you sell your investment property.

Key things to remember

As a short-term “stepping stone” to homeownership, it’s possible to have your cake and eat it too, as they say. However, you have to do your homework when considering the investment property.

This includes:

* Location
* Property condition
* Rental yield

You also have to consider how much you’ll be paying in rent to live in your dream location. Between paying your investment loan and your rent, it’s essential to live within your means. If you’re paying less in rent and you’ve invested in an area with a good rental yield, you’ll be in a better position to profit.

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