Rentvesting: Is It the Right Strategy for You?
Soaring house prices in capital cities cause people to continue renting and saving for a home loan deposit. The longer they wait, the more money they need because properties tend to appreciate in value.
This makes buying tough but there is an increasingly popular strategy that first home buyers are using to get a foot in the market. It is called rentvesting. So what is rentvesting? Could rentvesting work for you? Let’s find out.
What is rentvesting?
Rentvesting is a strategy where people rent a property in a location they want usually near their workplace, then buy a home in the suburbs in an affordable area and rent it out.
The property you buy is considered an investment because the rent goes a long way to covering the mortgage repayments and, hopefully, the property increases in value over time so it can be sold at a profit.
Once you sell the property at a profit, you have more money to put towards your dream home. Alternatively, you can just pay down the mortgage using the rent and then move in yourself when you can afford it.
You may also be able to tap into your investment property’s equity to purchase another investment property.
Is this the right strategy for you?
Owning an investment property has its advantages and disadvantages. You will be able to claim a tax deduction on your loan’s interest, insurances, rates and water utility expenses and claim depreciation allowances, potentially reducing your total taxable income.
You will also need to take into account Capital Gains Tax when you sell your property. Capital Gains Tax is applied if you make a capital gain when you sell an asset such as a house. This could have an effect on the total amount you are left with after selling your investment property.
Along with the tax benefits and responsibilities, there are also ongoing costs when owning an investment property. These include repairs and maintenance as well as the above mentioned council rates, insurances, property management fees, and more.
It’s imperative to take these factors into consideration if you’re thinking of rentvesting. Whether rentvesting is the right strategy for you will depend on your personal situation.