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First Home Buyers

Rentvesting – is it right for you?

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What's Rentvesting?

Rentvesting is an option for homeowners to enter into the market, where they rent in a location that they like and invest their money elsewhere into a more affordable property.

The idea is that you rent the home that works for your situation now, whether that’s proximity to work or friends and invest your leftover money into an investment property in a suburb (typical a cheaper, growth suburb), generating rental income to help pay off your mortgage and then later sold for capital gains.

This helps homeowners achieve their dream of owning a home whilst living where they want and also building a portfolio which will help you into the future.

Some people may view “rent money as dead money” but in this case it allows you to use it as an investment strategy without compromising on living where you want to.

Rentvesting has been touted as an option for first home buyers to climb the property ladder without giving up the lifestyle or location they want or entering into a financial situation they might not yet be ready for – perfect for first home buyers who are still looking to save a larger deposit.

 

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Pros... Getting ahead

With a lower overall cost of a deposit, you’ll be entering the market sooner than if you save for your dream home right away.

If you are investing in a property in an up-and-coming suburb, the cost of house and land will be much cheaper than an inner urban location. Getting into the market early means that whilst you rent in a location convenient to you, your property grows in value, meaning your capital gain can help you to improve your financial position in the long run. 

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Top Tip

Think with your head, not your heart!

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It’s business — not pleasure.

Often first home buyers can get caught up in the emotional side of buying a home because they want everything to work for their situation, and understandably so! 

Putting on your investors hat is necessary in order to look strategically at a home – purchase where you can afford and where the greatest return on investment will come from – you don’t have to stress about planning for your future in terms of location and you can rent in locations that suit your needs!

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You can ‘rent’ the lifestyle you want.

Location and lifestyle is one of the biggest parts of choosing where to live – whether that’s living close to work. Whether that’s living close to the office so you can walk to work, or in an inner-city area with great cafes and nightlife.

You can pick a location that suits you NOW whilst also planning for the future and getting ahead with an investment property

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Take note of Government grants to help!

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Grow your wealth

There’s no better time than right now. You can start to create an investment property portfolio. Getting into the finance game early means you’re getting a headstart on setting yourself up for the future. Saving for a deposit is easier when its less expensive.

In Melbourne, first home buyer grants include, when buying or building a new home, you may be eligible for $10,000 owner occupied property in metro Melbourne and $20,000 in regional areas.

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The best of both worlds

If you don’t like where you live or your circumstances change, you have the freedom to rent elsewhere and adapt to your changing life circumstances. Rentvesting allows you to keep your options open and still ‘adult’ at the same time, meaning you can try out different locations or jobs without the stress of selling a home.

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Use Negative gearing to your benefit!

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The Tax Benefits

There are various deductions you may be able to claim on your investment property come tax time, including interest payments on your investment property loan, depreciation and negative gearing.

Negative gearing is when the rental return on your property is less than your total interest repayments and all outgoings from the property – meaning that overall you lose money on the rental properties income in order to exploit tax benefits.

The key benefit is that you can now offset the loss against other income earned, such as your salary, reducing your taxable income and therefore tax paid.

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Cons.. Your Great Australian Dream may have to wait

Buying an investment property may mean delaying the purchase of a home you yourself will personally live in.

If your plan is to gather enough equity to be able to buy in your dream location, you will need to acknowledge that it may be a little while down the track until this happens. Many people relish the idea of saying goodbye to rent and hello to owning their own patch of paradise, you’ll just be taking an alternative route to get there!

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Where you rent, isn’t your actual home.

As much as it might feel like home it isn’t. You’re still the tenant and will be restricted in what you can paint, hang on the walls or update, compared to what you could in your own home. You might need to wait a bit but the route to the end goal is just a little different.

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There are always uncertainties with renting

While rentvesting offers freedom and flexibility, it can also lack structure one of the key reason’s people opt to buy their own home. You can settle down, make plans, plant roots (and a garden), and start a family.

When you rent, it may feel like that stability is out of your control and there is never a solid guarantee that the landlord won’t raise the rent or decide to sell in the future – but then again this is what you are potentially going to do and if it helps you reach the end goal it may be necessary.

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Periods of vacancy

When you own an investment property, you rely on the rental income it generates to offset your own living expenses. But if a tenant breaks a lease or there is an extended period of time between an old tenant moving out and a new one moving in, you’ll need to have a game plan ready in order to cover any additional expense. Having a back up fund is a great way to solve this issue if it happens

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You can’t set and forget

Just as you would expect the rental you live in to be well-maintained, so will the tenants in your investment property.

Unexpected expenses can pop up, so wear and tear happens. You’ll likely also need to factor in property manager fees too if you rent through an agent, which can range from 5-10 percent of the rent collected each month. It’s important to have some money aside to support this if needed.

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