The Pros and Cons of 'Rentvesting' - Pearl Financial

The Pros and Cons of ‘Rentvesting’

By Shane | Investing

May 26

With skyrocketing property prices in Sydney, there has been a term that is gaining traction amongst the younger generation looking to get into the property market – ‘Rentvesting’.

‘Rentvesting’ involves renting somewhere you want to live, whilst purchasing a property in an area that you can afford and renting out this property. This goes against conventional thinking – aren’t you supposed to own your own home before you start investing? The reality is our current economic environment is driving this behaviour.

Let’s take a look at the pros and cons of ‘rentvesting’.

Pros:

You get to live wherever you want

Imagine that you absolutely love the beachside lifestyle of Bondi. To purchase a property there, you would be looking at a hefty price tag. However, whilst renting, you effectively get to live wherever you want. An added bonus is you can choose how long to live there for, i.e. at the end of the lease you can ask to renew or move onto your next dream lifestyle location.

You control your budget

If you own the house you live in, you can’t really control your mortgage repayments. The bank dictates how much you need to pay each week, fortnight, month etc in order to be able to pay off the loan within the loan term. However, when renting you can adjust your situation according to your personal budget. If you are planning on taking a long overseas trip, you could rent a smaller property that requires less rent so you can save more. Alternatively, if you come across a financial windfall or score a promotion at work you could move to a more desirable suburb or property. This flexibility to scale up or down the rental market can give you greater control over your cash flow.

Maximise tax deductions

The interest you would pay on a loan for the property you live in, quite simply, cannot be claimed as a tax deduction. This would be particularly painful if you purchased in a high-cost suburb and therefore had a large home loan.

On the flip side, interest payable on investment property loans are fully tax deductible. This can be a substantial saving at tax time or, if you’re clever, you could realise this tax saving throughout the year using a little known and under-utilised tax trick (more on this in another post).

Get into the market sooner

By investing in a more affordable suburb whilst enjoying the lifestyle in your ideal location, you could reduce the deposit needed for a property. This means that you could get into the market sooner and potentially increase the capital gain over the long-term. Some people get stuck in the cycle of renting and are unable to save the large deposit for their dream home. By lowering the deposit goal, you could save your deposit in a shorter period of time even when renting.

Cons

You don’t own the place where you live

This is the most obvious disadvantage to ‘rentvesting’. There is a lot less certainty when you don’t own the place where you live… You could be asked to leave or the landlord may choose not to renew your lease. When this happens, you get to experience the next con…

Packing

I recently visited a client who was in the process of packing and the mere sight of the packing boxes sent chills down my spine. There is nothing quite like the torturous experience of packing your life into boxes, transporting it to a new place, before unpacking all the things you just packed. Whilst 99% of the population dread packing, the optimists amongst us may see it as a perfect opportunity to do some spring cleaning.

You can’t add your own flare

Renting means that you will have limited opportunity to make changes to where you live. The inability to paint a room or pop a few nails in the wall to hang some photos can be quite concerning for some people. Throughout my renting years, I never felt the inclination to add anything to the properties I lived in, however, I know some people who would go to extraordinary lengths to hang photos, paintings, and TVs off the wall. As with most things, each to their own…

It can be difficult to weigh up the pros and cons of ‘rentvesting’ as applicable to your personal situation, especially when your emotions are involved. Because of this, it is always wise to have an independent sounding board that you can bounce ideas off with the added bonus that they may potentially point out some considerations that you may not have thought about. If you are weighing up the benefits of ‘rentvesting’, be sure to speak with your trusted professional adviser.

Follow

About the Author

Shane specialises in helping Gen Y professionals and business owners make an impact by accumulating more assets, generating more income, and having more time to enjoy life. He has a Master of Applied Finance, an MBA, and a Master of Financial Planning. He is also a terrible golfer.

>