You can’t have the cake and eat it too, that’s what we have been told since childhood. However, Gen Y is perceptibly breaking out of this age-old adage by combining the best of both the worlds – renting and investing – through rentvesting.
What is rentvesting?
Rentvesting is a property buying strategy that has turned conventional wisdom on its head. Since most buyers feel locked out of the property market due to increasing property prices in areas they would like to stay in, Gen Y decided to take an alternate approach – rent where they want to live and buy where they can afford to buy. Apart from not compromising on their living choices, the rentvesters stand to build their wealth faster through a well-performing investment property portfolio.
Is rentvesting better than buying a home?
The debate between whether to buy a house or rent has transformed into whether to rentvest or buy and for good reason as rentvesting can definitely provide better value over renting.
But is rentvesting better than buying a home?
Well, many of us have slogged and scrounged for years to save a hefty home loan deposit to fund our dream homes, and feel mighty proud of it while we continue to scrounge and save to repay the mortgage and actually ‘own’ the house. But what if your dream house in your ideal location is unaffordable? You could still rent it…but that’s dead money one would say.
But what if the rental is sourced from the rental income on your investment property in a smartly chosen yet affordable suburb. You could even use the equity in this property to start building your property portfolio and save more from the tax cuts available on investment properties.
If David buys his dream house, after paying a 10% deposit and choosing a competitive low deposit home loan option he checked online, his monthly repayment will be about $3,500 (use our home loan calculator to know your repayments).
However, if he decides to rent a house in the same area, he would be paying $2,000 as rent. He will also be left with $1,500 to invest in another property in a more affordable upcoming suburb.
Will David choose to buy or rentvest? Let’s see…
Pros of renting while buying or rentvesting:
1. No compromise on lifestyle – With rentvesting, you can choose to stay where you like as you don’t have to save a deposit or pay the mortgage for your ideal house in your favourite suburb; you can simply rent it and enjoy the property while your landlord pays off the mortgage and other charges.
2. Flexibility – Flexibility is another factor that turned the scale towards renting in the ‘Renting vs. Buying’ debate and now tilts the balance towards rentvesting. While buying a house means fixing your roots in an area, rentvesting allows you to move around as per convenience. As more people get comfortable with moving around for better-paying jobs, rentvesting strikes as a more practical option over buying a house to live in.
3. Budgeting made easy – Buying a house means budgeting more – to afford a minimum 10% home loan deposit and keeping up with the repayments thereafter.
By rentvesting, while you still must maintain financial discipline to ‘own’ an investment property, it is possible to opt for a more affordable property as you don’t have to stay in it. Moreover, you can downsize or upgrade your rented house according to your changing financial situation regularly.
4. Building a property portfolio – Most property barons will tell you that wealth is not accumulated by owning a single home, but through a series of well-researched investments that not only provide high rental yield to take care of your investment loan, but also show high capital appreciation helping you buy your own home in the long run.
5. Tax benefits – Interest repayments on investment properties are fully tax deductible. A number of other deductions are also available for property investors. By taking an interest-only loan, it is possible to reduce the mortgage stress and start rentvesting as soon as you have found the right property to invest in.
With current home loan rates being low, you can compare mortgage rates online to find the best home loan deals in the market.
Cons of renting over buying (or rentvesting over buying):
1. Emotions – Like it or not, your rental home is not your own home. This means you cannot decorate your space as you like it nor can you develop that feeling of belongingness. Considering the emotions we attach to owning a home, renting seems an inferior choice. However, when it comes to money – would you choose heart over mind or vice-versa?
2. Choice – Is your dream house available for renting? Especially for niche properties, owners far outnumber renters, meaning your favoured piece of land may be up for sale but not for tenancy.
However, is it ever easy to find your dream home whether you are out there to rent or buy?
3. Shifting – With rentvesting comes the flexibility to move around and the pain of packing/shifting every few months. However, being on the move constantly can impart some worthy lessons in minimalism, help save more by not buying unnecessary stuff and also provide an annual cleaning opportunity.
Whether you choose to buy or rentvest, the ultimate benefit will depend on how well you researched your choice of property and your home loan. Get in touch with an expert broker to understand your options better.
By Vidhu Bajaj