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Is rentvesting better than buying a home to live in?

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Rentvesting can be a great option for those who want to own property, but can’t afford to buy in their current suburb. It means that you can buy in a more affordable location, possibly in another part of the country, while living a comfortable lifestyle renting in your ideal location.

For example, many Australians are aware of how expensive it is to buy property in Sydney which means that many residents there are renting for longer. But, for those keen to enter the property market, investing in property in another city could be an option.

In this article, we’ll explain what rentvesting is, why people do it and when it makes sense over buying a property to live in.

What is rentvesting?

In an expensive property market, buying a home to live in can seem just out of reach. But if you’re willing to look elsewhere, you may be able to find an investment property that you can purchase while continuing to live and rent in your current location.

To put it simply, rentvesting is when you buy an investment property in a suburb you can afford, while you continue to rent where you actually want to live. It means that you can maintain your current lifestyle while still entering the property market.

As with most investment properties, you rent out the investment property and earn a rental income. Plus, you get to enjoy a number of tax benefits exclusive to property investors.

Why do people rentvest?

Rentvesting is popular with people who want to live in an area that they can afford to rent in, but not afford to buy. However, they have been saving up and have the borrowing power to buy in a more affordable area. They’ll find a suitable property to purchase and rent out, allowing them to generate more income while still living in their ideal location.

Renting a trendy, inner-city apartment in Sydney or Melbourne will generally be less expensive than buying a similar property. Rentvesting over buying a home to live in makes sense when the cost to buy (i.e. mortgage repayments) is substantially higher than the cost to rent a similar property.

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Can you invest in another state or territory?

Yes! You don’t have to invest in property in your home state, territory or city. If you live in a major city, you could save a lot of money buying in a regional centre or smaller city. Make sure that you properly research the area to ensure that it aligns with your interests and investment goals. A cheap house in a country town may seem appealing, but how likely are you to find a tenant quickly? What is the rental income like, and what are the vacancy rates in the area?

Alternatively, think about investing in some up-and-coming suburbs or cheaper areas on the outskirts of the city.

When thinking about where you want to buy, consider the following:

  • Your investment goals (e.g. long term rental property, negative gearing etc.)
  • What kind of property you want to buy
  • Who your ideal rental tenant is
  • Vacancy rates in the suburb

Property management

If you buy an investment property far from where you live, you’ll likely need to get property management. In your absence, a property manager takes care of the day-to-day running of your rental property. Their main duties include:

  • Collecting and negotiating rent
  • Finding tenants
  • Conducting routine inspections
  • Arranging for repairs and maintenance
  • Collecting bond payments
  • Terminating difficult tenants if necessary
  • Organising payment of council rates and taxes

Being a landlord is time consuming, so even if you buy locally, a property manager can alleviate a lot of time and stress. With one, you won’t be responsible for answering late night calls and dealing with tenant issues.

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Pros and cons of rentvesting

Pros of rentvestingCons of rentvesting
Maintaining your lifestyle by living in your preferred suburb that may be too expensive to buy intoAs a renter, your landlord has rights over the property which can create uncertainty
Rentvesting can be a smart investment decision that could help build wealth and increase cash flowRisk of being made to find a new home with short notice, especially if you have a family
You get the flexibility that comes with renting, allowing you to move around more easily than if you were living in a home you ownedMost landlords won’t allow you to personalise your property in many ways (e.g. no painting or kitchen renovations)
Investment properties come with certain tax deductions and advantagesFacing capital gains tax (CGT) when you sell the investment property. CGT is not charged when you live in a property you own
A cheaper property means a lower home loan which will increase the strength of your loan applicationInvestment loans come with higher interest rates

When is it better to buy a home to live in?

Rentvesting isn’t a solution for everyone, even if you can’t currently afford your dream home. Here are some reasons why you might be better suited to buying a property to live in:

  1. You can afford to buy a suitable home in an area you like
  2. If you feel that your rental payments are dead money more than anything, you might be ready to be an owner occupier
  3. You don’t want to deal with an investment property or you would prefer to invest in the stock market, for example
  4. You are willing to sacrifice a trendy, convenient suburb for a more affordable suburban lifestyle

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Should I rentvest or buy a home to live in?

Deciding if rentvesting is the right move for you will depend on your financial situation, goals and personal circumstances. Whether you rentvest or buy a property to live in, you are entering into a major financial commitment. Always consider the whole financial picture and how you will be affected in the long term.

If you are unsure what to do, consider speaking to a financial advisor or a mortgage broker. Lendi’s Home Loan Specialists may be able to provide insight into your borrowing power and what you can afford.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: interest rate, home loan, new purchase, first home, first home buyer, rent purchase, investment, investment property, investing, borrowing power

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