For many Australians, the notion of buying a home of their own seems out of reach. Yet there are lots of first home buyers using creative alternatives to get into the real estate market sooner rather than later.

One option is known as rentvesting, and could be a helpful way for first home buyers to enter the property market now without actually living in the home.

What is rentvesting?

Rentvesting is the term used when you decide to purchase an investment property as your first home. You still become a homeowner, but you’re the landlord instead of the home’s occupant. Your tenants reside in the property, leaving you free to remain living wherever you choose.

Pros and cons of rentvesting

There are some distinct advantages of buying a rental property as your first home. Of course, there are also some disadvantages to take into account as well before making a decision. Here are some of the pros and cons of rentvesting.

Pros

Affordability: Rentvesting might allow you to buy a property in a price range that might not necessarily be anywhere near the location where you prefer to live. If your deposit amount or borrowing capacity is limited, you might want to buy a more affordable home in an area with strong rental demand, while you remain living in an area close to your work.

Flexibility and Freedom: Some first home buyers prefer to live near where they work, but the price of homes in those areas may be out of reach. Rentvesting allows you the flexibility of living where you want. You also have the freedom to move to different areas as the need arises without the need to sell your property.

Borrowing Capacity: If your income and expenses don’t allow you to borrow the amount of money you require to buy your first home for you to live in, choosing rentvesting could help. The banks factor in the rental income your tenants pay you and add it to your earned income, which could help boost your borrowing capacity.

Tax Advantages: Becoming a landlord could mean taking advantage of some of the tax deductions available for owning an investment property. For example, the interest costs you pay on your investment mortgage, along with any rates, management fees and other costs of owning the property could be tax deductible, which could reduce the amount of tax you pay.

Repayments: The rental income you receive from your tenants each month can be very handy for helping cover the cost of mortgage payments.

Future Capital Growth: Rentvesting could be a good way to begin building equity in your property. Over time, the value of your rental property could increase in value. When you’re ready to buy a home to live in, you can choose to sell your investment property and use the proceeds as a deposit on your owner-occupied property. Alternatively, you could leverage the equity you’ve built up to secure a future purchase for your own home.

Cons

While there are some great advantages to rentvesting, there are also some disadvantages to think about. These include:

Rent Payments: While the tenants are paying rent to live in your property, you’re still paying rent to live in someone else’s property.

Bad Tenants: Everyone has seen stories on TV about tenants from hell, so many property investors get nervous about getting bad tenants. Fortunately, the majority of property managers conduct background checks on tenants to reduce the risk of bad tenants and do regular routine inspections of the property to ensure your investment is looked after.

Capital Gains Tax: Capital gains tax (CGT) is charged on any profit you might make if you choose to sell your rental property. If you’re concerned about CGT or about what tax deductions might affect your financial position, always take time to speak to an accountant about your options.

There are plenty of different options available for first home buyers. If you’re curious about whether rentvesting might help you get into the property market sooner, speak to your mortgage broker today.

For more information relating to rentvesting or mortgages in general, contact Mortgage Australia today.