Rentvesting vs living in your first property

When you buy your first property, it doesn’t have to be your forever home. In fact, it doesn’t need to be your home at all. Rentvesting is becoming a more common way for people to enter the property market, but it comes with a few considerations. Here, we lay out the differences between rentvesting and living in your first home.

Rentvesting

Buying an investment property as your first step up on the property ladder is often referred to rentvesting. Essentially, rentvesting is buying a property that you will rent to tenants while you continue to rent, stay at home with the folks or even travel overseas.

Here are some things you should consider when you embark on rentvesting:

The extra costs of owning an investment property

Whether you live in your property or not, you need to ensure you can cover your costs:

  • Your mortgage
  • Insurance premiums
  • Rates and possible STRATA fees
  • House maintenance and utilities.

If you own an investment property, you might also need to consider:

  • Property management fees
  • Vacancy periods
  • Tax implications.

Your deposit and grants

The type of property you choose to buy for investment might be smaller than the house you intend to live in one day. The benefit - your deposit might be easier to save because you don’t need to save as much. So, you could be stepping on to that ladder quicker than you thought.

However, being an investor means you lose out on access to certain government schemes to help first home buyers enter the market. The First Home Buyer Grant and First Home Super Saver Scheme provided by the Australian Government are only available if you intend to live in your house, rather than rent it out.

Make sure you read the specific details to make the best decision for you. The grant is different per state and can change regularly.

Your home loan

When you buy a property specifically for investment, you’ll need to take out an investor loan. Investor loans generally have a higher interest rate. This means higher repayments or it will take you longer to pay off your home loan.

You might also think about taking out an interest only loan, where you only pay the interest on your mortgage rather than paying the principal and interest amount. Paying only the interest on your mortgage could benefit you in the short term, but have longer term implications. You can read more about how paying principal and interest is different to only paying interest.

Tax implications

Each tax year you need to declare the income you receive from your rental and deduct relevant expenses associated with your rental property.

These expenses can include:

  • Management and maintenance costs (like insurance and property management fees)
  • Interest on loans
  • Borrowing expenses (like stamp duty and loan fees)
  • Depreciating assets (like carpet and appliances).

Make sure you talk to an accountant to understand how owning a rental property can affect your tax in the long and short term.

Living in your first home

Paying off your own mortgage instead of paying rent can feel rewarding. The amount you pay in rent might be similar to your mortgage repayments, so you might not see a significant increase in your expenses. To pay down the principal amount of your mortgage, you’ll need to be making principal and interest repayments, not just interest only repayments.

You’ll no longer need to save for a house deposit either, which could mean spending your savings on fun things like holidays and renovations instead.

Your deposit and grants

Tapping in to the First Home Owner Grant or the First Home Super Saver Scheme provided by the Australian Government might quicken your road to home ownership. By living in or building your new home, you could get access to additional funds. Make sure you do your research on the grants and schemes available to make the best choice for you.

Your home loan

By living in your new home, you are an ‘owner occupier’. Owner occupier home loans usually have lower interest rates than investor home loans. That could mean your repayments will be lower, or you could pay off your home loan faster with a lower interest rate.

Making your decision

Buying your first home is a fun and often turbulent time full of decisions and new information. Knowing what you want to achieve when you buy your first property - and understanding the different options - can set you up long term to reach your property and wealth goals.

Keep in mind that everyone’s goals are different, so it’s always important to consult an accountant or financial advisor to help understand which option might best suit you.

When it comes to buying your first home, a Broker or a Home Finance Manager can help you with the finance and settlement process.

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Things you should know

The information contained in this article is of a general nature and is not intended to be nor should it be considered as professional advice. You should not act on the basis of anything contained in this article without first obtaining specific professional advice. To the extent permitted by law, Bankwest, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL / Australian credit licence 234945, its related bodies corporate, employees and contractors accepts no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this article.