If you’re in Australia, you might have heard about rentvesting. It is a growing trend in 2023 in Australia, but let us tell you why rentvesting is bad. The main disadvantage is that you aren’t exempt from paying the capital tax gains. This is because you don’t live in the house you own.
Due to the renting crisis in Australia after Covid, several properties are out of reach for many people. The 2023 real estate stats show that there is a housing affordability crisis in Australia. Thus, rentvesting is becoming popular. It allows the people to live in the capital cities. But, how do you do that? You’ll learn this in this post.
There are several other disadvantages of rentvesting. This article will help you understand:
- How rentvesting works
- Disadvantages of rentvesting
- Why buying to live is a better option
What is rentvesting?
Rentvesting is a strategy where you purchase an affordable investment property. You rent out the property to other tenants and rent a different place to live.
The strategy allows you to own a property without sacrificing a good lifestyle. Buying a property is too costly in the capital cities. Especially in Melbourne and Sydney it is difficult to climb the property ladder.
Through rentvesting, you purchase properties in rural or low-cost areas in Australia. But instead of living in them, you rent them out to other tenants. With the rent money, you live on rent in the capital cities. This allows you to have a property and enjoy the city life.
Thus, if you can’t afford these expensive properties, buy properties in the rural areas. Here’s an example to make it more clear:
Suppose you can afford to buy a property in Darwin or Adelaide. The property prices are low there so you can buy a property easily. You then rent out this property to other tenants and receive $1500/month.
On the other hand, you buy a lavish rental property in Sydney. It costs $3250/month. You’ll be paying $1750/month for it. This is because you’re getting $1500/month from your investment property. So, buying a duplex and renting half is also an example of rentvesting.
5 Reasons why rentvesting is bad
You might be thinking of rentvesting as a good strategy. However, before you implement it, consider its disadvantages. It is important that you go through these factors before choosing rentvesting. The following are the reasons why rentvesting is bad for you:
No capital gains tax exemption
In Australia, the assets in your personal use are exempt from capital gains tax (CGT). This is a great tax benefit as it reduces the amount of tax payable. This tax is payable when you sell the property.
However, this tax deduction is only available for owner-occupied properties. If you sell an investment property, there is a tax deductible to pay. In short, you can’t get the tax benefits through rentvesting.
Landlord responsibilities
As a landlord of an investment property, you must take care of it. For instance, you are responsible for its maintenance including repairs and landlord insurance. The ongoing ownership costs can be a headache. So, if a pipe bursts in your property, you’ll have to repair it. These costs accumulate too quickly and are difficult to manage. You have to bear homeownership costs and your rent.
Risky tenants
The main aim of rentvesting is to obtain rental income regularly. If you won’t get a regular rental income, your expenses will become unaffordable. Unreliable and risky tenants won’t pay rent for an extended period. This can be disastrous because you won’t be able to afford a high rent.
Expensive investor loans
Mortgage companies provide loans with higher interests for investment properties. If you have purchased an investment property through a lender’s mortgage insurance, this is worrisome. Owner-occupier mortgages have lower interest rates as compared to properties that you don’t live in. Thus, mortgage repayments are higher for investment properties.
No First Home Owners Grant
The First Home Owner Grant schemes are offered by the government. These are to help the people become homeowners. To be eligible for this grant, you must buy a property and live in it for at least 6 months. So, if you’re rentvesting, you’ll miss out on the home owners grant too.
People also ask
What is better: rentvesting or buying to live?
Rentvesting is not an ideal investment strategy. You have to manage homeowner costs and rent, both. Plus, you miss out on the first home owners grant. You don’t get the CGT exemption either. Buying to live has more benefits over rentvesting. However, it is important to do some research and find out what you need to know before renting out your home.
Can I rent out my owner’s occupied home?
If you want to rent out your owner-occupied home, you must inform your mortgage provider. Most mortgage providers have higher interest rates for investment properties. Always inform your mortgage provider and rent out the property. If you don’t, it might be a breach of the mortgage contract.
Is an apartment good for rentvesting?
Apartments increase in property value slower as compared to stand-alone homes in the property market. From the investment point of view, it is better to rentvest a stand-alone home. Besides that, the capital growth also varies according to the location.
