Rentvesting, as the phenomenon is known, is the act of buying an investment property while you rent your current residence. This may be the solution to the “champagne taste, beer budget” dilemma many Australians face.
But rentvesting is not for everyone. Before you take the plunge, here are five major ways that property investment differs from buying your own home.
What, exactly, do you want from where you live?
If, in the short-term, you want nightlife and access to amenities, but may struggle to afford to buy in a trendy spot, then renting in that neighbourhood and generating the income with an investment property in another more affordable suburb, might allow you to build wealth and save for that dream house.
If, on the other hand, you harbour visions of a place where the kids can grow up with good schools, parks and a decent commute for you, then home ownership may be more appropriate.
Rentvesting requires you to be skilled at real estate investing and have a focus on money. Owning a home is about living. An investment is about money. You can make money from an investment in real estate by selling it or renting it. The first takes an ability to control renovation costs, a keen appreciation of real estate market trends, good advice and some luck.
The second turns you into a landlord, responsible for taxes and other fees, upkeep, repairs, making sure the place is always rented, and occasionally chasing delinquent payers or evicting troublesome tenants.
Given the costs associated with purchasing an investment property, including closing costs beyond the purchase price, it may take some time for your rental property to begin to produce a positive cash flow. If you are counting on that income to help you cover the cost of your rent, what is your plan for the gap? What about periods during which the property is not rented? Take some time to develop realistic cash flow projections.
The monthly cost of renting is likely less per month than mortgage and maintenance costs for a similarly attractive home. That alone would seem to imply some savings. However, renters have no opportunity to recoup capital gains, as they would on the sale of a property that had appreciated in value. Remember that part of the monthly cost is lost opportunity cost.
Other financial concerns:
Always make sure you seek advice to inform your decision if rentvesting or home ownership will be the right choice for your individual situation. If you are making this decision with a partner, always ensure you are in agreement and final decisions are made together.
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Rolf is Managing Partner of Owen Hodge Lawyers. He has been in the legal practice since 1986 and a partner of Owen Hodge Lawyers since 1992. Rolf focuses on assisting clients to proactively manage legal responsibilities and opportunities to achieve competitive advantage.
Rolf concentrates on business planning and formation, directors’ duties, corporate governance, fund raising and business succession. His major interest is to assist business owners and their financial advisers plan and implement strategies to build and exit from successful businesses.
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