Trevor Sanderson lives in Manly on Sydney’s northern beaches in an apartment overlooking Queenscliff Beach. He loves it.
“I could cast a line into the ocean from my balcony,” he says. “I surf, so I like to be close to the ocean. I’ve been in the property for close to two years and I don’t see myself leaving any time soon.”
An apartment in his building recently sold for $4.5 million, a figure Sanderson says he “would never be able to afford”.
What he can afford is the weekly rent of $1050, and an investment property.
With guidance from Wade Curtis, chief executive of property investment advisory firm Curtis Property Group, Sanderson spent $570,000 last year on a positively geared, dual-key apartment in south-east Queensland.
“Essentially my strategy is to rent where I want to live but can’t necessarily afford to buy, and to build up a property portfolio by purchasing properties where I can afford them,” he says.
Sanderson has joined a growing number of rentvestors: people who purchase a rental property as an investment while renting another property in which to live.
Curtis believes rentvesting is going to become more prevalent among Australians looking to achieve home ownership now that house prices across the country have seen significant capital growth.
“I would say, going forward, 30 per cent to 40 per cent of clients will be looking to rentvest as opposed to home ownership as a first step,” he says. “Rather than delay wealth creation for years, they rent for lifestyle and invest in a cheaper property elsewhere.”
Curtis says rentvestors either choose to stay in the family home for longer or rent in share housing. Like Sanderson, many of his clients gravitate to lifestyle locations where they can be close to amenities like beaches, cafes or parks. Others like to live near their workplace, avoiding a long commute, or to be close to family and friends.
Julian Muldoon, a director at 1Group Property Advisory, says rentvesting works particularly well in CBDs like Melbourne where rents are affordable.
“If you’re busy and time-poor and you want to live in the city you may decide to rent an apartment but invest in a thriving area like Geelong,” he says. “You can be around Melbourne’s buzz and excitement but invest somewhere with more land content, better growth drivers and fewer supply issues.”
Renters also have more flexibility when it comes to country-wide opportunities for jobs or a fresh start in a new area.
“We’ve got a lot of clients that shift around Australia with their jobs,” Curtis says. “Rentvesting means they’re not tied to their own home that they then have to rent out or sell to go to the next place.”
Rentvesting can also be a way to secure a home you’d like to move into in the future, Muldoon says, with tenants helping to pay down the mortgage in the interim.
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Ideally, an investor should buy with their head, not their heart. As Muldoon puts it, property fundamentals need to rule over emotions. Removing lifestyle needs from the equation opens many more doors for investors.
“It opens up the whole of Australia as a market because you don’t need to buy a property where you want to live,” Curtis says. “Instead, you’re buying for affordability, rental returns and strong capital growth.”
Muldoon says it’s essential that buyers do their homework to unearth the highest-growth areas they can afford.
Those who are time-poor could consider using a buyer’s advocate or property advisor who will do the hard work on their behalf.
Thinking about investing?
While expenses incurred while living in your own home are not tax-deductible, those incurred in holding an investment property often are. If your investment property is negatively geared – meaning the costs of holding the property are higher than the income you get from leasing it out – you can claim that loss against your other income.
Depreciation of new properties over time can be claimed as a deduction, as can the cost of renovations and new appliances. You can also claim the interest you pay on your mortgage, the council rates, strata fees, property management fees and repairs.
Speak to your accountant or a qualified financial advisor to explore your eligibility for tax deductions.
What are the drawbacks of rentvesting?
Rentvesting is not without its disadvantages.
Curtis says first home buyers may have to forego government grants, which are often targeted at owner-occupiers, as most of these require you to live in the property you buy for at least six continuous months. In some states, handouts for first-home buyers can add up to $50,000, so it’s worth noting what’s on offer when the numbers are being crunched.
Another drawback is the lack of security a tenant must live with. It’s more difficult for tenants to put their own stamp on a rental property, and a landlord can raise the rent, decide to renovate or sell, and some may fail to attend promptly to maintenance requests.
Curtis also points out that the sale of your own home is tax-free, whereas an investment property typically attracts capital gains tax.
Muldoon says buyers should note that, as a wealth creation strategy, rentvesting needs to be a long-term proposition of 10-plus years.
“Where some buyers get it wrong is they don’t understand that rentvesting is a long-term move that ties up their cash and borrowing capacity,” he says. “It’s a trap to think, ‘We’ll rentvest for five years then cash out and buy the family home.’ People expecting short-term wins are not taking into consideration costs like stamp duty, agent’s fees and capital gains tax.”