What to expect when rentvesting
According to industry super fund bank ME, first home buyers are utilising rentvesting to enter into the property market. Here’s what benefits and costs rentvestors can expect.
According to Patrick Nolan, ME’s head of home loans, rentvesting can offer investors more options.
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“As an investor you have complete freedom of choice − within financial constraints − about where to buy,” said Mr Nolan.
“Your property doesn’t need to be close to work or family, so you can consider more affordable suburbs where you may not choose to live [in]. Yet these locations may still benefit from rising property values.
“So far, so good. But where will you live? That’s where the ‘rent’ part comes in. Renting is sometimes cheaper than owning in a given suburb, and as a tenant you’re free to select a neighbourhood that meets your lifestyle preferences.”
Mr Nolan said a rentvestor’s rental income assists in covering the costs of an investment property, with shortfall between rent and ongoing expenses claimable on tax.
“This is what ‘negative gearing’ is all about, and it can also mean saving tax on your regular wage or salary – money that can go towards paying rent on the place you live in,” said Mr Nolan.
Furthermore, increases in investment property value can be used to buy a home in the future, and not just with the sale of the property, as Mr Nolan adds some lenders may accept equity from a property as a deposit.
However, Mr Nolan warns rentvesting does have some costs attached.
“As a tenant, you won’t face maintenance costs on the place you live in – they’re the landlord’s responsibility. But as a rentvestor, you will be responsible for the upkeep of your own rental property,” he said.
Mr Nolan said rentvestors also need to be on top of ongoing expenses, such as insurance, rates and repairs, but these expenses may be claimed on tax.
The most important cost to consider for rentvestors, according to Mr Nolan, is that a rentvestor’s investment property is subject to capital gains tax.
“Unlike an owner-occupied home, which is tax-free, any profit you make on the sale of a rental place can be taxed,” he said.
“Knowing if rentvestment is the right choice for you can come down to crunching the numbers. But if it is, it can be a way to enjoy a slice of property market gains while still living in your preferred suburb.”