The Australian dream of owning your own home is as strong as ever but as property prices continue to soar, many first home buyers are looking at alternative strategies to make their real estate dream a reality.
One of the more common strategies I’ve witnessed recently is ‘Rentvesting’ or making your first real estate purchase an investment property rather than making it your home. It's a way for first home buyers to get into the property market but not necessarily have to sacrifice their lifestyle too much.
Having come across a number of people now looking to buy an investment property before their first home, I thought I’d look into it in more detail and weigh up the Pro’s and Con’s of this strategy for you below.
Most people buy property to suit their lifestyle needs. This is generally close to family, work or schools. This limits their options when looking to buy real estate and they may have to sacrifice on the type of property they buy or location to find a property that fits their budget. Rentvestors can continue renting where they want to live and buy in more affordable areas with good growth prospects but not necessarily somewhere they would want to live.
If you can find a positively geared property (one where the monthly rent exceeds the mortgage repayments) you could earn an additional income from your investment property. This could help pay your mortgage off quicker or go towards saving up for your second property.
Affordable Mortgage Repayments
When you purchase your investment property and find a suitable tenant, you may still need to contribute a small amount to cover each months mortgage repayments. Only having to contribute this small amount each month could make it more affordable for you to comfortably take on a higher mortgage.
Banks calculate your lending criteria differently if you're purchasing an investment property because they'll take the rental income your investment property will attract into consideration. Generally they accept around 60% of the rental income as a proportion and to calculate your borrowing capacity. Having this extra 60% added to your personal income could make a significant difference to the your loan approval and serviceability.
There are a number of expenses that you can claim as tax deductions in relation to your rental property. In most cases you can claim interest payments, maintenance costs and rates, among others.
Negative gearing means your investment property is earning less than the cost of holding it. You contribute to the shortfall in the hope that the property goes up in value in the future. These losses can be claimed as tax deductions against your taxable income. Many high-income earners like this strategy as a way to reduce the tax they pay on their income. However, it can often be a big drain on your cash flow and could severely limit your ability to borrow more money.
Capital Gains Tax
Capital gains tax is only payable when you sell your investment property. It's a tax based on the profit you made between buying the property and selling it. It forms part of your income tax and is not considered a separate tax – though it's referred to as capital gains tax.
No First Home Owners Grant
Buying an investment property makes you ineligible for the assistance provided by the federal and state governments for first home buyers. It only applies on your first home purchase and if you live in the property.
Security of Home Ownership
For many people, the decision to purchase a home is not a financial one. It's about the peace of mind and security of being in control of where you live without the hassles of dealing with a landlord or being forced to move from place to place.
Rentvesting won’t suit everyone but based on the details above, there seems to be a lot of merit to it.