Rent or buy? It’s a big question, but for those who can’t afford to buy in their preferred location, it could be an appealing solution.
Rent-vesting is the concept of buying in a growth market or more affordable area while renting where you want to live, with the intent to sell or leverage any equity to buy something else down the track.
On paper, it seems like a smart way to go. But like any investment strategy, there are pros and cons to consider.
Rent-vesting: what are the benefits?
Getting your foot firmly on the property ladder is of course one of the biggest benefits of rent-vesting. Instead of having to wait years until you can afford to buy your dream home, you could enter the market sooner with a smaller deposit, using an investment loan.
You don’t have to invest in locations you love, either. It’s all about making smart decisions, without emotion, and choosing a suburb with good growth and a demand for rental properties. That way, you can use the rental income to help pay off the mortgage (while also enjoying the potential tax benefits that come with being an investor).
Another plus to rent-vesting is the lifestyle choice it offers; you’re much more flexible about where you can choose to live. Renting in different locations enables you to ‘try before you buy’, and because you’re not locked into a hefty mortgage, you’ve got the freedom to move wherever you like, whenever you like.
For many home owners, rent-vesting may be a great stepping stone towards building wealth for the future.
Potential downsides to rent-vesting
Paying rent is a bitter pill for any wannabe homeowner to swallow – because you know your hard-earned cash is going towards paying off someone else’s mortgage rather than your own.
You’ll also need to budget for an investment property – and you may need anywhere from a 5-20 percent deposit before you can buy. If you have a deposit that’s less than 20 percent you’ll need to factor Lender’s Mortgage Insurance (LMI) into your budget, which can cost you thousands.
The other issue is that you can’t ‘set and forget’ an investment property. You may expect that the rent a tenant pays will completely cover your mortgage payments – but if you bought it without much of a deposit, there’s every chance you’ll have a shortfall to cover.
Factoring in strata fees, council rates, insurance and maintenance costs may also be necessary – these are all your responsibility as a home-owner. And if you can’t find a tenant or your property is empty for a time, you’ll have to cover the entire mortgage payments.
So while rent-vesting can be a worthwhile strategy, it’s important to budget for all contingencies and ensure you can actually afford your investment without getting into financial difficulties.
Bottom line: should you do it?
Before deciding if rent-vesting is a good strategy for you, it’s important to consider your financial position and your personal circumstances.
Can you afford to rent a lifestyle and service an investment property (including the mortgage payments and other fees and expenses)? Where do you want to be in five years? Do you have a family to consider? What are your long-term goals?
These are all great questions to consider if you’re looking at rent-vesting as an effective investment strategy. You may wish to seek advice from a financial planner before you decide whether it’s the right choice for you.
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