Rentvesting is a great way to expose yourself to the market with a low amount of capital, yet still live in a desireable area to faciliatate the lifestyle that many young people seek.
Rentvesting is when you invest in a property, rent it out, then rent out another location yourself. Essentially you buy where you can afford, and rent where you want to live. There are a range of advantages to this, and a few drawbacks, which I’ll outline so that you can see if this is a suitable strategy for you.
First of all, lets consider cashflow, which is the most important thing for a younger person, especially on a lower income. In order for this strategy to work, you’ll need a property that has positive cash flow, so that you aren’t digging money out of your pocket for both your property and where you are renting. Very few properties are investment worthy, so do your due diligence when identifying a suitable property. When calculating cash flow, consider more than just mortgage repayments. Think about council and water fees, insurance, strata fees (if they apply), and property management fees. You also run the risk of damage occurring to the property, in which you are legally bound to fix (more on this later).
Once you find out the cash flow of the investment property, it should be positively geared. This will help you pay off your rental. It will take some budgeting, but you should find a rental that you love but costs little enough so that you can amass some form of savings that you can pay off potential damages to your rental. Tenants aren’t the kindest people, and according to Murphy’s Law, something is bound to go wrong that you are going to be out of pocket for. So budgeting for an emergency fund is essential.
Another massive advantage is that your investment property is now income producing! This means that you can write off depreciation, and inherit other tax benefits. You wouldn’t be exposed to these benefits if you just bought a primary residencce. For more information on this, talk to an accountant.
Because you are investing, you can buy somewhere away from the CBD. This means that you can buy rural, which in many cases can experience higher capital growth and stronger rental returns. Thinking of East Maitland for example, you can buy a 3 or 4 bedroom, freestanding home for under $500k, which is less than an apartment in the middle of Newcastle.
The key takeaway here is that if you play your cards right, you can get your foot in the property door by purchasing a property outside of the CBD, whilst also receiving the benefits of living in the city. The biggest risk is buying the right property, the whole process hinges on purchasing the right place. If that’s something you need help with, consider getting in contact with a buyer’s agent.