Owning a home was once a cornerstone of the Great Australian Dream. However, thanks to skyrocketing property prices in many parts of the country the dream is starting to take a different shape for some buyers: rentvesting.
Instead of buying the property they want, rentvesters keep renting in an area they like living in. Then they buy a more affordable investment property somewhere else. They may never live there but they own a property and they're paying it off. For some Australians, it's their best shot at entering the market.
Rentvesting is an investment strategy for would-be home owners who can't afford their dream home yet.
Let's say you want to buy a four-bedroom home in Sydney’s inner west, but the sale prices in the area mean these homes are out of your reach. By following the rentvesting strategy you'd simply rent the kind of property you want to live in.
Instead of buying this expensive dream home, you purchase a more modest property in a suburb where prices are more affordable. The property you buy can then be rented out to help cover your own rental payments and later sold for a capital gain. This strategy lets you have the lifestyle you want now, while at the same time building a property portfolio for the future.
As another example, let’s assume that buying your dream home leads to mortgage repayments of $4,000 a month. But if you rent a home in the same area, rental payments could be $2,200 a month, leaving you with $1,800 per month to invest.
Affordability is poor in many markets that have seen huge surges in growth in a short period. However, there are others where growth has been consistent and still trending higher. Look to identify suburbs where houses are still affordable relative to average household incomes.
Rasti Vaibhav, Author and property strategist
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On paper, renting often works out cheaper in the long run than buying. This is because home owners pay a lot of money in interest compared to rent. A quick example calculation of renting versus buying costs found that renters end up hundreds of thousands of dollars better off over the 30 years it would take to pay off a mortgage. Not to mention maintenance and other costs of owning property.
But this doesn't factor in future equity growth, which is something only home owners (and investors) can take advantage of.
Rentvestors get the best of both worlds in some respects. This is because they get to build equity in a property while avoiding the heavy cost of a mortgage on their dream home. Their maintenance costs on their investment, and their mortgage interest, are all tax deductible too.
But rentvestors also end up renting and paying off a mortgage. They have to deal with all the problems renters face, such as unresponsive landlords and the possibility of having to move every few years. This can be frustrating for many people.
Before you choose to buy a home or rentvest, make sure you can afford to rent and have a mortgage. Just because an investment property is cheaper than your dream home doesn’t necessarily mean that you can afford it, and just because renting feels like throwing away money doesn’t automatically mean you should mortgage yourself to the hilt.
Use a mortgage repayment calculator and break down your costs. Before deciding on either approach, you could also benefit greatly by seeking out expert advice from a mortgage broker.
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If you rentvest to start, and later move to your investment property (1 year later), what are the CGT implications when you decide to sell?
Hi Sofia,
In cases where the rental property becomes the main residence, you may qualify for a CGT exemption if you live there for at least 12 months before selling.
I hope this helps.
Cheers,
Richard
If I buy a property, rent it out for a while whilst renting another property myself, then later move in to my property, what are the tax implications? Will I be subject to CGT for the investment period of the owned property? How is it calculated if I don’t sell until a number of years later? Anything else I should consider?
Hi Dsal,
Thank you for your question and for contacting finder.com.au – we are a financial comparison website and general information service, we are not mortgage specialists so can only offer general advice.
Basically, in your case, the CGT you’ll pay will be worked out by comparing the number of days you lived in the property to the number of days you rented the property. You’ll also be partially exempt from capital gains tax. You can find more details about CGT on our guide to selling properties and capital gains tax.
Cheers,
May