What you need to know about rentvesting
One of the big banks announced recently it has seen a 10 % increase this year in buyers purchasing an investment property as their first home; known as rentvesting, first-time buyers often use this as a strategy to get onto the property ladder.
According to NAB executive for home lending Denton Pugh, NAB insights show this strategy is especially popular in NSW and WA.
With interest rates being lowered again, some first-time buyers may be looking at their options for property ownership. In this article we take a deeper dive into rent-vesting, explaining what the potential benefits are, and what needs to be considered.
What is rentvesting?
This is the term given to when a person buys a property in one suburb while choosing to rent (or sometimes live with family) in another suburb.
Typically, people buy in the more affordable suburbs, but are living in a location more suited to their lifestyle.
What are the benefits of rent-vesting?
- Affordability
Buying a property in some popular suburbs in Newcastle is out of reach for many first-time buyers. Rentvesting allows buyers to purchase in some of Newcastle’s more affordable outer suburbs, where prices are lower and rental yields may be higher.
- Lifestyle flexibility
As a rentvestor, by renting where you want to live (eg close to work, beaches, cafes, and transport), you can still maintain the lifestyle you want to have while investing in areas that are less desirable for you to live in.
Plus, you still have the freedom and flexibility to quickly change your living location for relatively less cost or hassle.
- Tax advantages
Investment properties come with a range of tax benefits, including negative gearing and depreciation deductions. These financial perks can make owning an investment property more attractive than buying a home to live in.
- Strong capital gains
With improvements to infrastructure and planning, over time, some of Newcastle’s suburbs potentially offer better capital growth potential than others. Later down the track, you can either sell the property and use it to buy your dream house or another purchase, or refinance and use the equity to buy another investment property.
What are the downsides to rentvesting?
- Unable to benefit from some first-time home buyer incentives
As you won’t be living in the property, you may not be eligible for some of the first-time home buyer incentives.
- Investment home loans
As an investor, you will need to take out an investment loan. Investment home loans can come with different requirements and features, and these may not have as good a deal as those offered for residential properties.
- Financial risks
You will still need to consider the usual risks of investment property ownership; these include planning for potential vacancy when the property is between tenants and ongoing maintenance. Plus, you will need to budget for general running costs such as landlord insurance, strata, council tax and some utilities.
- Capital gains tax
While there is the potential to make good capital gains on some properties over time, unlike selling your main place of residence, as an investment property, there will be tax to pay on the capital gains.
- Less security
If you are renting, there is always the potential risk the owner of your rental property may want to sell, meaning you will now have to find another place to live.
What else should I consider?
Think about your financial goals, and as with any investment – do your homework and background research.
Speak to a financial specialist to find out what works best for your situation, and make sure you fully understand the financial risks involved.
When you’re looking at budgets, remember, you will still need to comfortably pay your own rent and outgoings while ensuring the monthly investment property costs are covered.
Once you know your budget, do your research into suburbs and what makes a good investment property. If you find a property, and you’re not sure about its investment potential, we’ll happily take a look, and give our thoughts on what rental income you could potentially expect, and what else you need to consider.
We can also explain what your responsibilities as a landlord are, and how our property management services can actually save you a lot of stress, and free up your time to do the things you want to do.
As one of Newcastle’s longest established real estate offices we have helped hundreds of property investors realise their dreams through property for nearly 50 years. Give us a call on 02 4956 9777, email us at mail@newcastlepropertymanagement.com.au or call into our Cardiff and meet the team!
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