In many discussions with our clients, we’re faced with the common question:
“Should I buy or rent my home..?”
There certainly isn’t a one-size-fits-all answer to this question and it very much depends on your individual circumstances and financial goals. This week we’re exploring a strategy commonly referred to as rent-vesting, whereby you’re still investing in property while renting your primary residence. This can be a worthwhile strategy for many, but given that a property purchase is a significant milestone for many Australians, it’s important to do your homework before leaping in.
Let’s first explore what ‘rentvesting’ is…
Rentvesting refers to a scenario where you purchase an investment property to be rented out to a tenant, while you rent the property that you reside in. This would be referred to as your main residence. While the logic may not be clear just yet, this strategy can add a great deal of value in the right scenarios.
This is a popular strategy, particularly amongst younger couples and singles looking to get into the property market, however are having difficulty saving up the deposit for the area that they’d like to live in, facing limited supply or if they’re not sure whether the area will actually be a good investment. Given that home prices have risen particularly in inner-city areas, that are close to the workplaces of many, rentvesting has become a popular strategy.
Pros of Rentvesting
We’ve outlined some of the pros to rentvesting below:
- Reside in your preferred location: Renting your main residence may allow you to enter your preferred suburb and location, which may not have been within reach if you had to wait until you saved up your deposit. This may also bring forward this dream and turn it into reality if you were worried that saving the deposit was simply going to take too long.
- Flexibility of location: Another key benefit of renting is that you’re able to relocate if needed without a great deal of hassle, particularly when compared to buying your primary residence. If you change jobs or even lose your job, relocate to another area, or your partner is relocated for their job, you can easily shift without needing to worry about selling your home or renting it out.
- Tax benefits: Negative gearing is one of the key benefits of the Australian tax system for property investors, and this is particularly relevant for those considering rentvesting as a strategy. This allows you to claim the expenses incurred in holding and maintaining your investment property such as property management, repairs, maintenance, body corporates fees, as well as the non-cash deductions such as the depreciation of the building costs and fixtures/fittings. You may find that this allows you to realise the tax benefits on a regular basis and boost your regular cash flow.
- Building up a portfolio: You may decide that you wish to continue down the path of rentvesting and build up your portfolio of investment properties. This could allow your returns to continue to compound, and even the tax benefits being realised as a result of negative gearing. As we’re referring to tax strategies here, it’s important to consult your account or tax adviser to discuss your own situation.
- Rental income: Rental income over time will typically increase for most properties by inflation over long periods of time, which provides a regular and predictable cash flow. This could form part of your future retirement income, or provide a consistent income stream for your beneficiaries as part of your estate.
- Borrowing capacity limitations: You may also be facing restrictions in terms of your borrowing capacity, which could be preventing you from getting into the home that you wish to live in. Rather than waiting until you can borrow enough, purchasing a lower-priced investment property and renting your main residence may be a better solution.
Cons of Rentvesting
Outlined below are some of the key drawbacks of rentvesting.
- First Home Owners grants: The first home owner grants and any other State or Federal Government concessions wouldn’t be available for somebody looking to purchase an investment property. This may be a significant hindrance for your own financial situation and cause you to lean towards buying your main residence instead. Again, it’s important to do your homework here.
- Tax implications: If your investment property does grow in value and you decide to sell it, this may create some exposure to Capital Gains Tax (CGT), which applies at your own marginal rate of tax, whereas your own home would typically be exempt from Capital Gains Tax. Remember to consult your accountant to explore what may be right for you here.
- You’re the tenant: For some people, being a tenant and not owning the four walls around them can create unnecessary stress and anxiety, which is important to factor into the equation. If you aren’t up for rent inspections, and don’t want to have to seek approval from the landlord to make material changes to the property, rentvesting may not be the right strategy for you.
- Rent vs. mortgage repayments: This is a common one that we often hear that everybody would much rather be paying off their mortgage than paying rent, or even more commonly put, ‘why are we just paying off somebody else’s mortgage when we could be paying off our own’. Quite often, they’re failing to include the interest on the mortgage that would also need to be paid in the event of purchasing a property. It’s important to do your homework here, run your numbers either by yourself or with your Adviser and consider the overall cash flow impact.
If you’re considering your options and you aren’t quite sure which is going to be suitable for you, be sure to reach out to a qualified professional to start exploring the scenarios for you.
To Your Financial Success!
Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Planner with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to Australian professionals in Singapore. Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
Australian Expatriate Group is a division of Global Financial Consultants in Singapore providing specialist advice to Australians living abroad.
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General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.
*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.