Rentvesting as an alternative strategy
Rentvesting is a strategy which has been used by many as an alternative method for creating wealth through property. This type of strategy has been most popular with first time property buyers, as well as those wanting to live their desired lifestyle whilst committing to creating long term wealth through the power of property.
Rentvesting deviates from the traditional ‘buy a home first, then buy an investment property later’ approach, but it has merit and has been considered by many modern Australians.
In simple terms, the rentvestor rents where they want to live, at the same time they become a landlord themselves for property they own. This goes against conventional thinking of buying your own home before you start investing… however the reality is that our current economic environment is driving this type of behaviour as property prices climb to new heights.
A rentvestor builds their asset base independently of home ownership until such time as they can afford their much sought-after dream home.
Like any strategy, there are pros and cons, so lets take a closer look at some considerations which may help you determine if this strategy is right for you.
- Live the lifestyle you want. If rental prices allow, you can live in your dream property (and location) now and not have to compromise. Plus, you don’t have to worry about taking on the long-term commitment of a big mortgage. At the end of the lease period, you can renew your lease or move onto your next dream lifestyle location.
- Flexibility with cashflow. When you’re renting, you can easily upgrade or downgrade to a different home or location if your circumstances change. For example, you decide to take a long overseas holiday, or you lose your job, or get a high-paying promotion. You can scale up or down with no significant changeover costs that comes with buying property (such as stamp duty).
- Enter the property market sooner. Rentvesting allows you to break into the property market sooner with a smaller deposit, as opposed to waiting several years until you are able to afford your dream home in your dream location. ‘Time’ is the magic sauce to creating long-term wealth through the power of property.
- Tax benefits. Interest payments on your investment property loan is a tax deductible expense, which is a significant advantage particularly for high income earners on the highest marginal tax rate.
- Let others help you. Owning investment property means that the tenant and the tax man contribute towards paying off your investment property. In fact I have seen many cases where 70% of the cash flow commitment is being funded by the tenant and the tax man (collectively). But be warned, you also have a new commitment to maintain which is the rent expense where you live.
- Build wealth. Rentvesting allows you to start building your investment property portfolio sooner, creating long-term wealth for you and your family.
- Save for your dream home. Owning an investment property allows you to leverage against the growing equity in your investment property (or properties) which ultimately enables you to buy your dream home in the future.
- Mobility. If you’re not ready to put down permanent roots in a particular area, rentvesting gives you the freedom to move around and even travel the world if you wish. This is most popular with the younger demographic who are super keen to explore the world.
- Choose where to invest. In some cases, where you want to live may not necessarily be the best place to buy an investment property. Rentvesting allows you to be ruthless when it comes to choosing an investment. My advice to clients has always been… “decide on a place to call home with your heart, but select an investment property using your head and your calculator”.
- You don’t own your home. As much as you may love your rental property because of its location or because of the great neighbours, you don’t own it. This can be especially difficult if you form an emotional connection to a house (or location) but then the landlord wants you to move out as their circumstances have changed.
- You can’t ‘make’ it your own. Although a rental property might be vastly improved by a cosmetic renovation or simply a fresh coat of paint, remember that it’s not yours to tinker with.
- Reduced borrowing capacity. If you rent an expensive home to live, your borrowing power is significantly impacted as this commitment is included as an ongoing liability from your after-tax dollars. Rental income from your investment property is only partially included as additional income to service your new investment loan.
- Buying an investment first. Buying an investment property before purchasing your own home can seem counter-intuitive to many people. I have seen this on many occasions where people are stuck in the old belief that you need to own your own home first.
- Dead money. The old adage that “rent money is dead money” may be a deterrent for some people considering this approach. I have heard this umpteen times over the years.
It can be difficult to weigh up the pros and cons of rentvesting as everyone’s situation and lifestyle is different. The best thing you can do is to jot down your own pros and cons and work out what your bigger picture is, and consider talking to a professional to confirm or to challenge your thinking.
Remember, you can’t eat an elephant with one bite. Sometimes it takes small bites (steps) to achieve your bigger picture. Rentvesting offers the flexibility to invest in a proven asset (property) to create long term wealth, whilst maintaining a flexible lifestyle.
Food for thought perhaps..!!
Disclaimer: This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and seek specialist advice from a suitably qualified and licensed advisor.