The Sydney property market has become increasingly inaccessible for first-time buyers over the last decade or so. But some buyers are getting creative by starting off with an investment property rather than their own home. This is also known as rentvesting.
What is rentvesting?
Rentvesting is when you buy an investment property as your first property. Meanwhile, you continue to rent in a share house or apartment, or live with your parents. This practice allows you to get onto the first rung of the property ladder with the safety net of a tenant contributing to your mortgage. Plus, you’ll benefit from the many tax deductions associated with a rental property.
With rentvesting, you can also increase your equity by topping up your mortgage, without the burden of covering the whole sum. When you have built up enough equity, perhaps over a few years, you can either buy a home for yourself or move into your rental property full time.
Rentvesting isn’t just for first-time buyers. It’s also worth considering for those who are restructuring their finances, perhaps due to divorce or financial upheaval. Rentvesting gives you a foothold in the property market so you don’t get stuck in the rental trap permanently.
What are the pros of rentvesting?
The main benefit of rentvesting is that it allows you to enter the property market sooner. And therefore, to pay off your mortgage sooner too.
Rentvesting also widens your choice of property. You can buy in an area with good growth prospects – which may not be where you want or need to live yourself – and gradually build up your wealth. You can also look for exactly the right investment, such as an apartment in need of light renovation, that may not be readily available in your area.
Investing this way also gives you the freedom to continue renting in an area you love that might not be affordable to buy in. And meanwhile, you are still growing your wealth over time.
It is also a good option if you need some flexibility. For example, if your work situation is insecure, a small investment property with good rental prospects is safer than taking on a larger mortgage. When you borrow to invest, your lender will include rental income in your calculations. So buying an investment property and renting it out can be a smart way of capitalising on your increased borrowing power.
You’ll also benefit from numerous tax deductions, which you won’t enjoy on a mortgage.
What are the cons of rentvesting?
And what about the disadvantages? Well, the main one is that you are still paying rent. And many people see this as ‘dead money.’ Furthermore, you lack the security of living in your own home. Your landlord can still move you on. And he or she can put up the rent without warning. But for a few years, at least, rentvesting can be a pragmatic choice that eases you gently out of the rental market.
Always do your research. Have a chat with a mortgage broker to help you decide if rentvesting will work for you. Every person’s financial situation is unique, and for some it may be better to simply take the plunge and buy something to live in straight away. For others, rentvesting is a smart option.
Talk to us
We are experienced inner Sydney property managers as well as real estate agents. Right now we have some great investment properties on our books if you are thinking of rentvesting. Please give us a call today for a no-obligation chat. And feel free to share your thoughts and experiences of rentvesting in the comments.