Rentvesting, a strategy in property ownership, involves renters purchasing property in areas with high rental yields and leasing it while residing elsewhere. It’s increasingly recognized as a tax-efficient solution to counter FOMO (fear of missing out) in the face of soaring house prices. What are the tax benefits of rentvesting?

Rentvesting offers a pathway to enter the property market for those who may not immediately afford their desired home, enabling investors to initiate a wealth-building journey sooner than anticipated. Success hinges on seizing opportune moments, with the primary benefit often being the ability to enter the property market ahead of schedule.

The main benefits of rentvesting include:

  1. Access to the Property Market: Rentvesting allows individuals to enter the property market even if they cannot afford to purchase their desired home in their preferred location. By investing in areas with high rental yields, they can start building wealth through property ownership while renting elsewhere.
  2. Flexibility: Rentvesting provides flexibility in lifestyle choices. Renters can choose to live in areas that suit their lifestyle or work requirements while investing in properties that offer better rental returns or potential capital growth.
  3. Tax Advantages: Rentvesting can offer tax benefits, including deductions for expenses related to the investment property such as mortgage interest, property management fees, maintenance costs, and depreciation.
  4. Wealth Creation: Rentvesting enables investors to build a property portfolio earlier in life, potentially accelerating wealth creation. As property values appreciate over time, investors can benefit from capital growth and rental income.
  5. Diversification: Rentvesting allows investors to diversify their property portfolio by spreading their investments across different locations or property types, reducing risk and increasing potential returns.
  6. Mitigating FOMO: For those experiencing FOMO (fear of missing out) due to skyrocketing house prices, rentvesting offers a practical solution to enter the property market without compromising financial stability or lifestyle choices.

Overall, rentvesting provides a pathway to property ownership, wealth creation, and financial freedom, offering numerous benefits to investors seeking to navigate the challenges of the real estate market.

How it works

The rentvesting strategy works equally well for young people who might still be living with their parents while paying minimal rent.  This essentially means that they can pay off the mortgage on their investment property faster. It also means you can live in an area that suits your lifestyle even if you can’t afford to own property in that postcode.

As such, established properties with land are highly valued for their growth potential and lifestyle/tenancy appeal.

 The tax gains of rentvesting

According to the Australian Tax Office (ATO), you can claim the following expenses:

  • Water and council rates
  • Home insurance
  • Agent fees and commission
  • Repairs and maintenance
  • Tenant advertising
  • Depreciation deductions for general wear and tear from natural causes
  • Land taxes
  • Interest on mortgage repayments

Another tax benefit is negative gearing, that can make the cost of investing in property more affordable.

Moreover, there’s a notable advantage if you initially buy a property, reside in it for six to 12 months, and subsequently rent it out: you won’t incur capital gains tax on the property’s growth for up to six years, thanks to what experts term the “six-year rule.”

This rule allows you to maintain your former home as your primary residence for capital gains tax purposes, even after you’ve moved out.

However, analysts caution that if you don’t establish the property as your place of residence and haven’t lived in it, capital gains tax will apply from the outset of your rentvesting strategy. Should you opt not to inhabit the property before renting it out and later decide to sell it after at least a year of ownership, half of the property’s value appreciation will be considered a capital gain.

For instance, if you realize a $300,000 profit upon selling an investment property, $150,000 would be subject to taxation at your marginal tax rate.

As always, it’s essential to seek guidance from your financial advisor or lender to ensure that the rental income you receive, minus expenses, exceeds or equals the rent you pay. This diligence ensures the viability and profitability of your rentvesting strategy.

Rentvesting Strategy: A 3-Step Guide

Here’s a three-step plan to kickstart your property journey:

Save a Deposit

Saving up a deposit may pose the greatest challenge, especially in a market witnessing soaring property prices. However, it remains entirely feasible for those committed to realizing their goals.

A prudent target is to save up to 20% of the property’s value as a deposit. Recognizing that this can amount to a substantial sum, it’s advisable to begin with an investment property of lower value compared to a primary residence.

Effective strategies for deposit accumulation include:

  • Set a clear savings goal
  • Track expenses and trim unnecessary costs
  • Select a savings account with a competitive interest rate
  • Establish automatic transfers to your savings account
  • Continuously monitoring progress toward your goal

Identify Your First Property

This stage necessitates professional assistance. Engage the expertise of a Buyer’s Agent, Mortgage Broker, and Property Manager. A Buyer’s Agent aids in locating a property within your budget, while a Mortgage Broker streamlines lending comparisons and procedures.

Key considerations for selecting the right property include:

  • Location suitability
  • Growth potential
  • Low vacancy rates
  • Favourable rental yields.

Progress Toward Additional Properties

Rentvesting aims to expedite wealth accumulation through early entry into the property market. Consequently, the subsequent objective is to acquire additional properties.

Assuming success, your initial investment property may yield positive cash flow. Leveraging savings and equity from this property can facilitate securing deposits for subsequent investments or even your envisioned dream home.

Invest with Confidence

Initially, the concept of rentvesting might appear unconventional – why rent while simultaneously paying off a mortgage? Yet, with meticulous budgeting, informed decision-making, and alignment with lifestyle preferences, rentvesting emerges as a logical choice.

For instance, you might be a single individual aspiring to enter the property market, with your desired home currently beyond financial reach. Alternatively, you might relish your current rental situation but foresee a move in the future. Or, you could be entrenched in urban living but anticipate a shift to a more spacious locale down the line.

Ultimately, rentvesting offers a flexible and strategic approach to property ownership, catering to diverse circumstances and aspirations.

As always, it’s essential to seek guidance from your financial advisor or lender to ensure that the rental income you receive, minus expenses, exceeds or equals the rent you pay. This diligence ensures the viability and profitability of your rentvesting strategy.


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General Advice Warning

The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.

Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.

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