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Deciding Between Rentvesting vs Buying Property in Australia

Owning a home is something many aspire for. However, with the increasing real estate prices in Australia, it’s not always feasible. 

This is why many are turning to rentvesting – the practice of renting a place in a desirable but expensive area while investing in a more affordable property elsewhere to generate income (also by renting it to others) to offset living expenses. 

There are pros and cons to both rentvesting and buying a home. 

Consideration Rentvesting Buying a Home 
Flexibility High Low 
Location Live where you want Limited options 
Income Potential rental income No rental income (limited) 
Upfront Cost Lower Higher 
Maintenance Lower responsibility Higher responsibility 

Rentvesting prioritises flexibility and affordability in a desired location with potential income while buying offers stability but with higher upfront costs. 

Let’s discuss renting vs. buying a home.

What is Rentvesting?

Rentvesting lets you live in a desirable area by renting while simultaneously owning an income-generating property elsewhere. This strategy is common for those who want a vibrant lifestyle, like young professionals who can’t afford to buy in prime locations.

Imagine living close to work in the city but owning rental property in a rural town to subsidise your rent. Sure, it sounds easy, but is it feasible? Let’s explore the considerations of rentvesting: 

Advantages of Rentvesting vs Buying a Home

  • Live your dream lifestyle. Rentvesting lets you live where you want while building wealth through property ownership. You can buy an investment property in a more budget-friendly area to generate rental income to offset the cost of renting in your preferred location, allowing you to “live cheaper” while also building equity. 
  • Enter the property market. Without the pressure of needing a huge down payment for your dream home, you can target cheaper properties requiring a smaller down payment. This makes it easier for you to reach the 20% threshold to avoid the Lenders Mortgage Insurance (LMI). Additionally, you will also have a lower Loan-to-Value Ratio (LVR), so you can negotiate a better interest rate, leading to potential cost savings on your mortgage. 
  • Maximise your tax advantage. Rental properties offer potential tax advantages such as repairs, maintenance, and mortgage interest, which can be considered deductibles from your taxable income. This can reduce your tax burden and boost your overall financial situation.  

However, it is important that you talk to a professional to understand specific tax implications in your area before making any decisions. 

Disadvantages of Rentvesting 

  • Residential Instability. You can still face potential disruptions as a renter in your primary residence. For instance, your landlord may choose not to renew your lease, raise rent, or schedule inspections. 
  • Investment Risk. Property values are not guaranteed to rise fast in more rural areas, so there is a chance that your investment property might not make the best return, which is not making good use of your money. 
  • Ongoing Costs. You will have to juggle your ongoing expenses for both your rent and your investment property. This can include mortgage payments, property taxes, maintenance, and potential vacancy periods with no income. 

Understanding Buying a Home

In real estate, buying a home refers to acquiring a property for your primary residence – that is, the place where you live. But before you jump into a big financial decision, it is better to understand its pros and cons. 

Advantages of Buying a Home vs Rentvesting

  • Security and stability. Owning a home fosters a sense of security and stability. Your monthly payments are consistent and predictable, and you have your own place to live with no potential disruptions like lease renewals and rent increases. 
  • Potential for home equity growth. The increasing stake in your home (which happens as you pay down the mortgage) increases your equity. This is called equity growth, and you can leverage this for financial benefits like home renovations, a second investment property, or retirement savings.
  • Control over property. You can go beyond simply decorating or painting the walls – owning a home means personalising your space to reflect your style and needs – subject to permits and regulations. 

Disadvantages of Buying a Home

  • Less flexibility in relocating. As a homeowner, you can be tied to a specific location. You can’t just wrap up your belongings and leave if you want to relocate for work, family, or a change of scenery.  
  • Vulnerability to market fluctuations. Homeownership carries the risk of fluctuating property values. If the market dips, you could face negative equity, where you would owe more to your mortgage than your home is worth.   
  • High upfront and maintenance costs. The down payment for your dream house, closing costs, and the mortgage itself can be a substantial amount. Moreover, they will also be responsible for ongoing expenses like property taxes, insurance, maintenance, and repairs, which can add up quickly.

Now that you have a better idea about the financial realities of rentvesting vs buying a home, it’s time to compare the costs and potential returns:

Financial Comparison of Rentvesting vs Buying a Home

Below is a table comparing the financial factors of rentvesting vs buying a home. Take note that this is for general informational purposes only and should not be considered financial advice. Always consult a qualified professional before making investment decisions. 

Factor Rentvesting Buying a Home 
Upfront Costs Lower deposit for an investment property in rural country towns. Higher deposit for buying your dream home in a prime location 
Rent bond or deposit for renting your primary residence  

 

Additional Expenses Rent for your primary residence Mortgage repayments + Rates, insurance, maintenance 
Investment property costs (mortgage, rates, maintenance)  
Potential Returns Capital growth on investment property + Potential rental income Capital growth on your home 
Tax deductions on investment property expenses (consult with a tax professional)  
Tax Implications Potential tax deductions on investment property expenses (consult with a tax professional) Potential tax benefits on your principal residence (capital gains tax exemption) 
Government Incentives Potential depreciation deductions on investment property Potential First Home Buyer Grants (eligibility criteria apply) 

Choosing between rentvesting vs buying a home boils down to upfront costs or long-term benefits. 

Rentvesting lets you enter the property market faster with a smaller deposit but consider ongoing rent and investment property expenses.  

Buying a home offers potential increased value and growth but demands a larger investment if you want to buy closer to the city, including ongoing costs for mortgage, taxes, and upkeep. 

Both options can get government perks: rentvesting with depreciation deductions and buying with potential first-home buyer grants.

Real-Life Examples of Rentvesting vs Buying a Home 

Let’s examine how these options translate into real-life scenarios. We’ll explore how both rentvesting and buying a home can help people achieve their financial goals. 

Young Couple Achieves Financial Freedom with Rentvesting 

Michael and Sarah, a young couple in Brisbane, wanted to buy a home near their work, but houses in the area were too expensive. Instead, they opted for rentvesting and started looking for a property in regional areas.  

They found a two-bedroom unit in Ipswich, a city 40km west known for its affordability. Michael and Sarah could afford the $320,000 apartment with a downpayment of $140,000, which led to manageable expenses and less financial stress.   

Their Ipswich unit was rented for $1,800 per month, exceeding their mortgage payment and generating a surplus. This extra income helped offset their Brisbane rent, reducing their living expenses.  

By rentvesting strategically, Michael and Sarah enjoy the Brisbane lifestyle while building equity in a property with growth potential. This approach allows them to invest in their future without sacrificing their city lifestyle. 

Millennial Couple Live the Australian Dream of Buying a Home 

Young Sydney couple Sarah and David craved the stability and financial benefits of homeownership. Renting offered flexibility, but they wanted to build wealth. 

Their challenge was finding a property under $800,000 with long-term value. Their realtor helped them explore fixer-uppers in up-and-coming areas, which offered lower entry points and potential for future growth. They landed a charming 3-bedroom townhouse needing cosmetic updates for $750,000 with a 20% down payment of $150,000. 

Their monthly mortgage payment is $3,200, slightly more than their current rent of $2,800. However, the difference translates to significant gains. Each $3,200 mortgage payment includes roughly $800 towards the principal, building equity in their home. Over time, this grows their net worth. 

Owning also meant more space, perfect for a future family. Unlike renting, they could personalise their space and make modifications as they see fit. Most importantly, they gained stability and became free from rent hikes and lease non-renewals. 

The initial investment meant some compromises for Sarah and David, but it empowered them to build a solid foundation and a place to call their own, with the potential for long-term wealth creation through equity.

Making the Decision Between Rentvesting vs Buying a Home

Now that we’ve explored the financial realities of rentvesting vs buying a home, let’s talk about the factors that will influence your decision. Here are factors to consider: 

Personal Financial Goals

You have to consider how your finances are doing.  

  • Debt Repayment. Determine whether you can afford your debt repayments and consider whether a mortgage or investment property will align better with your financial goals. 
  • Retirement Savings. Rentvesting will free up cash flow, but owning a home offers long-term equity growth. 
  • Investment Timeline. If you plan to sell your investment quickly (less than 5 years), rentvesting may not be the best option due to transaction costs and market fluctuations. 

Current and Future Lifestyle Preferences

Beyond finances, you also have to factor in lifestyle considerations. 

  • Desired Location. Rentvesting offers flexibility to live anywhere you choose, but buying is great if you want to settle down in a place you love.  
  • Responsibilities. Landlords need to handle maintenance issues, additional financial reporting, and managing the rental property. Homeowners, on the other hand, deal with maintenance and home repairs.  
  • Family Needs. Growing families, especially those with children, may require stability that homeownership offers, but smaller, more mobile families may prefer to rent instead. 

Opportunity Costs

Each decision you make will involve trade-offs, and here are the things you might have to give up with each approach: 

  • Investment. Funds for a down payment or mortgage could be invested elsewhere, like stocks or bonds. 
  • Geographic Mobility. Buying a home ties you to a specific location, which can limit career or lifestyle changes that require relocation. 
  • Liquidity. Rentvesting offers greater liquidity because selling an investment property in the future is easier and faster than selling a home. This means you can access capital more readily. However, buying property in a prime location in the city offers more capital growth than buying in a rural area.

Summary and Conclusion

Deciding between rentvesting vs buying a home requires you to weigh your finances, lifestyle, and future opportunities. 

Rentvesting lets you live in your dream area while owning an income-generating property elsewhere. It requires a smaller down payment and has potential rental income and tax benefits, but it also comes with less stability, rental management work and ongoing costs. 

Buying a home offers stability, potential equity growth, and control over your space, but it requires a larger upfront investment and ongoing costs for mortgage, taxes, and upkeep. 

When deciding where to invest your money, consult with experienced advisors to help you analyse your unique situation, explore your options, and develop a strategy to achieve your long-term goals. 

 

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