Many of us like the idea of living in good locations; I mean good suburbs that offer close access to cafes, entertainment, public transport, food, schools, Medicare, etc. Unfortunately, not many of us can afford to buy in these locations early in our careers; we simply don’t have a big enough deposit, or our income isn’t high enough to borrow a sufficient amount from the bank. This is why the concept of rentvesting was born, which is becoming more and more popular these days.

Rentvesting means renting in the location you want to live and, at the same time, purchasing an investment-grade property somewhere else.

Let’s look at some of the pros and cons of this strategy.

Pros:

Lifestyle and flexibility: You can choose to live where you want without having to own the place. Quite often, renting the place you want to live in is a lot more affordable than actually owning it. In addition, your job or personal circumstances may change over time, and therefore, renting gives you the flexibility to move around quickly.

Less pressure on mortgage repayment: If you stretch yourself too much to purchase in an expensive suburb, this may put a lot of pressure on your household income, limiting opportunities in other important areas of life such as new career opportunities, traveling, and living in a different city. Rentvesting gives you the option to use leverage to purchase a good investment property without putting too much pressure on your income.

Buying the right investment property: The suburb you like to live in, grew up in, or are familiar with is not necessarily a good area to invest in. Therefore, it is not a good idea to buy in this area even though you can afford to do so. So, rather than owning a property in this area, you will rent and purchase a good investment asset somewhere else. Remember, your first investment property will be the stepping stone of your investment portfolio, so you want to get the first one right. The equity you build in this first property can then be used to get you into the next property.

Having the best of both worlds, main residence exemption, and tax deductibility: Usually, a property stops being your main residence when you stop living in it. However, for CGT purposes, you can continue treating a property as your main residence:

• For up to 6 years if you used it to produce income, such as rent (sometimes called the ‘6-year rule’).
• Indefinitely if you didn’t use it to produce income.

During the time that you treat the property as your main residence after you stop living in it:

• It continues to be exempt from CGT (the same as if you were still living in it, even if you start renting it out after you leave).
• You can’t treat any other property as your main residence (except for up to 6 months if you are moving house).

If you start renting the property out after you leave, you can claim deductible expenses on this property. The 6-year rule gives you the option to sell the property in the future tax-free and then use the proceeds to purchase another property or do anything you like with your own life. At the same time, you can claim deductible expenses on the property while it is being rented out.

Cons:

Having to purchase in an unfamiliar area: You may not have enough knowledge about other areas to make an investing decision. The idea of buying in an unfamiliar territory may scare off a lot of people. This issue can, however, be resolved by having a good buyer agent on your side. Your job is to do some research and pick a reputable name you can rely on to source a good investment property for you and then let them do the heavy lifting of finding the right property.

Day-to-day management: You may buy in a different suburb or a different state, so you won’t see your property very often. Instead, you will rely on your property manager to manage the property for you. Your job is to do research and pick a good name to manage the property for you. To be honest, this is what you should do anyway, even if you have the capacity to manage the property by yourself. It is a good idea to let a professional do what they are good at so you can focus on other important aspects of your life.

Insecurity: Some people like the idea of seeing and feeling what they own, so if this is you, you may feel a bit insecure because you are spending a large amount of money on something which you rarely see. While this is understandable, it should not be a reason that stops you from rentvesting. After all, what you are trying to do is to build as large an asset base as possible, not to enjoy the day-to-day sight of your investments. So, as long as you have a good team on your side to look after the property for you, rest assured that you own the property and it is working hard to one day give you the lifestyle choices you are looking for.

That is it for this week. If you know anything else about rentvesting, please comment below. Until the next post, whatever you are doing, enjoy it and make the best out of life.

Disclaimer: The information provided in this blog is for informational purposes only and should not be construed as financial or investment advice. The decision to engage in rentvesting or any other financial strategy should be made after thorough research and consultation with a qualified financial advisor. The author and this platform do not assume any responsibility or liability for any actions taken based on the information provided in this blog. Always seek professional advice and conduct your own due diligence before making financial decisions.