Owning a home was once a cornerstone of the Great Australian Dream. But thanks to skyrocketing Sydney property prices, the dream is starting to take a different shape for some Sydney residents. With the median house price hovering around the $1 million mark, breaking into the property market is extremely difficult for many first-time buyers.
This has led to the rise of rentvesting: instead of buying the property they want, people rent a home and then invest their leftover money elsewhere. For example, say you want to buy a four-bedroom home in Sydney’s inner west, but the sale prices in the area mean these homes are out of your reach.The rentvesting solution to the problem would be to rent the ideal four-bedroom house where you want to live, and then buy a property in a suburb where prices are more affordable.
The property you buy can then be rented out to help cover your own rental payments and later sold for a capital gain. This strategy lets you have the lifestyle you want now, while at the same time building a property portfolio for the future.
As another example, let’s assume that buying your dream home leads to mortgage repayments of $4,000 a month. But if you rent a home in the same area, rental payments could be $2,200 a month, leaving you with $1,800 per month to invest.
Pros and cons of rentvesting
Enter the property market sooner. Rentvesting allows you to break into the property market sooner with a smaller deposit, as opposed to waiting several years until you are able to afford your dream home.
Live the lifestyle you want. If rental prices allow, you can live in your dream home now and not have to compromise on location or features, and you don’t have to worry about taking on the long-term commitment of a big mortgage.
Build wealth. Rentvesting allows you to start building your investment property portfolio, which can be used to generate wealth for you and your family in the future.
Save for your dream home. Owning an investment property allows you to save to buy your dream home.
Flexibility. When you’re renting, you can easily upgrade or downgrade to a different home if your circumstances change, for example if you lose your job or get a high-paying promotion, with are no stamp duty expenses or legal costs to worry about.
Move around. If you’re not ready to put down permanent roots in a particular area, rentvesting gives you the freedom to move around and even travel the world if you wish.
Tax benefits. You can claim interest payments on your investment property loan as a tax deduction.
Choose where to invest. Where you want to live and the best place to buy an investment property often won’t be the same, so rentvesting allows you to be ruthless when it comes to choosing an investment.
Buying an investment first. Buying an investment property before purchasing your own home can seem counter-intuitive to many people.
Dead money. The old adage that “rent money is dead money” may be a deterrent for some people considering this approach.
You don’t own your home. As much as you may love your rental property, you don’t own it. This can be especially difficult if you form an emotional connection to a house but then the landlord wants you to move out.
You can’t make it your own. Although a rental property might be vastly improved by a renovation project or simply a fresh coat of paint, remember that it’s not yours to tinker with.
The basic concept of negative gearing is turning a negative into a positive.
The main aim of any investment is to make a profit, but unfortunately that doesn’t always happen. From an unexpectedly low rental market to unforeseen expenses when purchasing a property, there are several reasons why the cost of an investment can outweigh the income it generates. This is a negative outcome, but you can use it to your advantage when tax time rolls around.
The cash loss you notch up on your investment can be used to offset the income you receive, for example from your salary or wages, meaning that as a whole you will be required to pay less tax to the ATO.
In effect, you can use the taxation system to bear the brunt of the impact of your investment loss in the short term, and in the long term you will hopefully make a capital gain on your investment when the value of your property rises.
Pros and cons of negative gearing
Reduce taxable income. You can turn an investment loss into a gain by using it to offset your income and pay less tax.
Long-term gain. While negative gearing can provide a financial boost in the short term, you can also take advantage of a long-term capital gain when the value of your investment increases.
Sound strategy. Negative gearing can be a sound investment strategy for people who choose their investment property carefully and who have the financial means to absorb any investment losses or rising interest payments over the long-term. This strategy is suited for financially disciplined investors.
Tax deductions. Negatively gearing your investment property also entitles you to a wide range of tax deductions.
Risk. Borrowing money to fund an investment always carries an element of risk in the form of rising interest rates or in the event that your property depreciates in value.
Disadvantageous to the economy. Negative gearing can potentially destabilise the economy by encouraging people to borrow more money and by pushing up asset prices.
Disadvantageous to property market. Negative gearing can drive up prices on existing houses and it does little to generate new housing supply.
Favours high-income earners. Negative gearing typically benefits high-income earners and makes it harder for first home buyers or low-income earners to break into the property market.
Right Location Location is an important factor for property investment. If you choose the right place, you can enjoy high return from capital gain. Several factors to consider : a. Close proximity public transport (train, bus, tram, ect) b. Close to shop and market c. Close to School d. Choose an area where Government put money for infrastructure to build town centre, road, public transport, shopping centre, ect
Right Market Price Property is difficult to price. To know property price, you should do research to surrounding area with similar criteria then you be able to predict how much the property price. Price will be the important factor because we need to choose a property is more likely to increase in value in the future.
Population Growth The law of supply and demand states that when there is high demand for product, the price rises. If there is a large supply of product but not enough demand, the price falls. In property market, supply and demand is prominent, so choosing an area that increase in population also affected the property price in the future.
Visible and Physical: Unlike other investment like share, property is something that real and available, people can visit the property, see it directly and touch it.
Increase in Value: The value of your property will grow over time and may be extremely beneficial financially if well chosen. Not only will you benefit from steady capital growth, but regular monthly rental returns.
Good Long term Investment: in Australia, base on 30 year history, property price double the value in 7-10 years. Thats way property investment is one of the best investment.
Considered Low Risk: This is the only investment market which is not dominated by investors, hence creating a natural buffer in the market.It is also the most forgiving investment; if you purchase the worst house in the area, chances are that its value will still increase over time.
People always need a property: Property is a primary need for human. Everyone need a shelter. As the population grow, demand for property also rise.
Limited Supply: To provide a property require big amount of money, that's way sometimes the supply is limited.
Tax benefits: Although tax benefits should not be used as a decision-making factor, it can be a benefit of investing in property. If your property is negatively geared, it may provide tax benefits.
Generally, buying off the plan only require 10% deposit of the contract price. there will be no progress payment until the property is completed.
Some state require to pay stamp duty few months after the contract is exchange, some state is payable on the settlement. Please check the stamp duty payable with the solicitor or the conveyancer during the contract signing.
The completion time is also vary from project to project, generally is around 1,5 years to 2 years. If the project is big, it could goes to 3 or 4 years.
The other thing that need to aware is the sunset date. The developer might say the estimation completion but this is not guarantee. Developer has time until the sunset date to finish the project.