Rentvesting: the not-so-new phenomenon
At first glance it seems like a strange thing to do: rent out a property that you own while paying rent to live in somebody else’s place. Yet this phenomenon of ‘rentvesting’ is proving popular, driven by a mix of lifestyle and financial factors.
Why do it?
A prime reason to rentvest is to get a foot in the door of the housing market. While 66% of Australian homes are owner-occupied, that figure is well under 50% for under-35s.
It has become popular for young adults to stay in the family home, contributing a bit of board to Mum and Dad while paying off an investment property with the help of a tenant. It can provide for a quicker entry into property investment or home ownership than would otherwise be possible.
Increasingly, ‘rentvestors’ are renting homes in attractive suburbs in which they can’t afford to buy, while investing in a less attractive, but potentially higher growth location. Driving this trend is the difference in rental yields. As a percentage of property values, rents tend to be lower in desirable areas, down as low as 2%, than the yields of over 6% available in more affordable suburbs.
In the reverse situation, some people opt to rent cheaply while buying a higher-value property, often with the expectation the investment property will enjoy a higher rate of capital growth.
And then there are those who want to or need to regularly move house but still seek the comfort that owning a property can provide.
Making it work
Attractive as the lifestyle benefits may be, rentvesting also needs to work financially. At the minimum you need to be able to pay your rent and cover any net expenses on your investment property.
Over the long term you also want to end up in a better financial position through rentvesting than would otherwise be the case, so it’s important to understand the property market and form an opinion on where prices are headed.
There are also a number of tax issues, both positive and negative, to bear in mind:
- You can claim a tax deduction against your earned income if the outgoings on your investment property (interest payments, council rates, insurance, agent fees, etc.) exceed the rental income, i.e. if the property is negatively geared.
- Rental income in excess of expenses is taxable at your marginal tax rate.
- Rent on the property you live in needs to be paid from after-tax income.
- Any profit on the sale of a rental property is subject to capital gains tax, whereas the profit on a principle residence is tax-free.
Is it right for you?
Like the idea of taking in the sea views from your rented home while a tenant is paying off the mortgage on your investment gem in a suburb set to boom? It can be worth exploring. Just make sure you understand the concept from all angles. Your financial adviser may not provide advice on direct property investment, but they can act as a sounding board to help you ensure you have everything covered.
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