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Why first-time investors should consider 'rent-vesting'

Sydney Lower North Shore houses symmetrical aerial
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Rentvesting can allow you to live in a hard-to-buy-into location like Sydney's Lower North Shore, but still get on the property ladder. Photo: Shutterstock

Why first-time investors should consider 'rent-vesting'

For first-time investors who feel like their dream homes and investment goals are out of reach, rent-vesting can be a viable option.

For first-time investors who feel like their dream homes and investment goals are out of reach, rent-vesting can be a viable option.

What is 'rent-vesting'?

Rent-vesting allows you to rent the kind of home you want, while borrowing money to invest in a lower-cost property, then using the rent money from that property to help pay off the mortgage. Breaking into the property market while living in an ideal home may not seem so impossible with rent-vesting.

How does rent-vesting work?

As both a tenant and landlord, you get to purchase a house or unit in a location in line with your budget while renting in an area you can’t afford to buy.

The goal is to buy in a suburb with growth potential so that your mortgage can cover your rent. Ideally, you want a rental yield of 5 per cent or more to ensure your mortgage repayments are met without having to dip into other sources.

This strategy is meant to build equity, which you can use to purchase further investments.

What are the advantages of rent-vesting?

  • You get to choose where you live and in a comparatively nicer home. People often tend to settle on what they can only afford, but renting is more flexible. This means you’ll have more opportunity to upgrade or downgrade your home or move around if needed.
  • You get to choose where to invest. Where you want to live and where you want to invest are not necessarily the same. Rent-vesting allows you to be more strategic when it comes to both.
  • You can build wealth. Once you have enough equity from rent-vesting, you can start building your investment portfolio, which will generate profit and wealth for your future.
  • You get plenty of tax deductions. An investment property’s interest repayments are fully tax deductible and you can claim depreciation on the building structure as well as plant and equipment. This means greater savings when it’s tax time.

What are the disadvantages of rent-vesting?

  • Your options are limited. Premium properties often fall into the hands of owners rather than renters. This means your dream home may not be up for rent.
  • You don’t have control over your home. As a tenant, you can’t make the changes and improvements you want to your home.

Legalities

Legislation differs across Australia, so check with the relevant body for current legislation in your state or territory. In Queensland, the  Property  Law  Act  1974  stipulates that any property may be held by two or more persons under a ‘joint tenants’ or ‘tenants in common’ arrangement.

Under a joint tenants agreement, the entire interest of the property is under joint ownership and none of the parties owns the property individually. Also, shares and interest over the property do not have to be equal and depend entirely on the agreed shares of the parties.

Are you suited for rent-vesting?

So, should you rent or buy? The right approach will depend on your own circumstances.

You will want to assess if you are financially ready for either choice. You must also be ready for extra costs when it comes to being a landlord, such as insurance, repairs and maintenance, land tax and property management fees.

Do your own research and speak to experts, such as a financial adviser or mortgage broker, so you can be sure you’re prepared for whatever investment decision you make.

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