With housing affordability under serious strain in Australia, many first home buyers find themselves asking – should I buy a home to live in, or rentvest instead?
Rentvesting allows you to get on the property ladder by renting where you want to live while simultaneously purchasing an investment property in a more affordable area. The goal is to build wealth through capital growth on the investment property, eventually enabling you to buy your dream home in your preferred location.
So, what are the benefits of rentvesting versus buying a home?
Pros of rentvesting
Rentvesting offers several distinct advantages over buying a home to live in, particularly for those just starting out in the property market.
Rentvesting allows you to get your foot on the property ladder much earlier. Instead of waiting years to save for a large deposit on your dream home in your desired location, you can start building equity with a smaller deposit on an investment property in a more affordable area.
One of the biggest draws of rentvesting is the freedom it provides. You can live where you want, close to work, friends, or lifestyle draws such as the beach or entertainment, without being limited by your purchasing power. This is particularly appealing to young professionals and those who value lifestyle flexibility.
By investing in areas with strong growth potential, you can potentially build wealth faster through capital appreciation and the fact you’re in the property market. This can put you in a better financial position to eventually buy your dream home in your preferred location.
Investment properties offer various tax benefits, including deductions for expenses like mortgage interest, property management fees, and depreciation. These deductions can help reduce your taxable income and make the investment more affordable.
While you’re renting without investing, you’re essentially just paying someone else’s mortgage. With rentvesting, you’re using your rental income to afford your own investment property’s mortgage, building equity for yourself.
Pros of buying a home
While rentvesting offers a pathway to property ownership, buying a home to live in remains a desirable goal for many.
If you have a substantial deposit and can comfortably afford mortgage repayments in your desired location, buying a home can provide stability and a sense of ownership.
For some, the desire to own a home and establish roots in a specific area outweighs the potential financial benefits of rentvesting. The emotional security and lifestyle benefits of homeownership are key considerations.
If you enjoy renovating and personalising your living space, buying a home provides the opportunity to create your ideal environment.
Renting can be subject to the whims of landlords, including lease terminations and rent increases. For those without the flexibility to move, such as those with a young family who want to lock into a certain area to access a specific school catchment, this risk can be too much to take on. Buying a home eliminates this uncertainty and provides long-term housing security.
What about from a lending perspective?
When weighing up whether to buy a home versus rentvest, it’s also important to examine things from a lending perspective. If the bank won’t lend you enough money or if the costs of servicing a loan are too high, you may be robbed of having a choice between these two scenarios.
From a lending standpoint, the “better” option isn’t always clear-cut and depends heavily on individual circumstances.
Here are some considerations from a lending perspective which can impact whether buying a home or rentvesting will be more advantageous.
Loan serviceability
Lenders will assess your ability to repay a loan by considering your income, expenses, and existing debts. With rentvesting, lenders will consider the rental income you expect to receive from your investment property. However, they often apply a “haircut” to this rental income to account for potential vacancy periods or management fees. This means the assessed rental income might be lower than what you actually receive, impacting your borrowing capacity. When buying a home, your existing rent is discarded as you’re moving into the home, and the serviceability is assessed on the new mortgage repayments only.
If you’re currently paying a substantial amount in rent, purchasing a home can actually improve your borrowing power. Lenders recognise that your existing high rent payment is a significant financial commitment that will no longer exist once you move into the home. This reduction in your living expenses can free up cash flow, making you a more attractive borrower. Therefore, buying in this scenario could allow you to borrow more than if you were to try and rentvest.
Conversely, if you’re currently paying minimal rent or living with family, rentvesting might be the more advantageous option from a borrowing perspective. In this situation, lenders may be willing to lend you more money because your living expenses are low, however, only if you can prove to have greater capacity to service a larger loan. If the bank won’t lend you enough to buy a home, then your current borrowing capacity can be channeled towards purchasing a more affordable investment property, setting you on the path to building wealth.
Deposit requirements
Generally, lenders require a larger deposit for investment loans compared to owner-occupier loans. This is because investment loans are perceived as riskier. This could mean needing to save a larger deposit for rentvesting initially, even if the property price is lower than what you might buy as an owner-occupier.
Interest rates
Interest rates for investment loans are typically slightly higher than owner-occupier loans. Lenders may also offer different loan products and features for each type of loan. It’s vital to compare interest rates, fees, and loan terms for both owner-occupier and investment loans to understand the total cost of borrowing.
Lenders Mortgage Insurance
Lenders may also have stricter Loan-to-Value Ratio (LVR) requirements for investment loans, meaning you might need a larger deposit to avoid Lenders Mortgage Insurance (LMI) or will need to incur this cost upfront.
Tax implications
While this isn’t strictly a lending issue, the way you structure your loans can have tax implications. For example, if you’re negatively gearing your investment property, the losses can be offset against your taxable income. It’s crucial to consult with a financial advisor and accountant to understand the tax implications of both buying and rentvesting and how loan structuring can impact your overall financial position.
Future borrowing capacity
Your existing mortgage, whether for an owner-occupier property or an investment property, will affect your ability to borrow more money in the future. Lenders consider your total debt levels when assessing loan applications. Therefore, it’s important to consider your long-term financial goals and how your current borrowing might affect your ability to purchase a future home or make other investments.
The decision to buy a home or rentvest is a personal one, influenced by individual circumstances, financial goals, and lifestyle preferences. From a lending perspective, the optimal strategy depends on several factors. Carefully evaluate your financial situation, research market trends, and seek professional advice from your mortgage broker or financial adviser to determine which path best aligns with your aspirations for property ownership.
Want to know whether from a lending perspective you’re best placed to rentvest or buy a home? Reach out to Fabe Financial for a no-obligation chat today.