How to rentvest your way to financial success
For young people who are unwilling to sacrifice their inner-city lifestyles, the strategy of renting in the city in conjunction with buying an investment property portfolio could be the golden ticket.
It allows you to maintain your current lifestyle, while also generating long-term financial gains.
When it comes to buying your first property, Australians have two main options:
1. Purchase as an owner-occupier. In this instance, first homebuyers save up to purchase the perfect home they will live in, usually with the assistance of a home loan and 25- to 30-year mortgage.
2. Purchase as an investor. In this instance, first homebuyers purchase an investment property in a more affordable area while continuing to rent in their preferred suburb.
Given the current media interest in renting where you want to live and purchasing an investment property, it may seem like a newly formed concept, but investors have sung this strategy’s praises for decades.
The benefits of investment properties come down to two main elements: cash flow (the return generated on money spent) and compound growth.
Unlike sole owner-occupiers who generate income from their salary alone, property investors have two additional streams of income – rent generated from tenants living in their investment properties, and tax benefits.
Investment properties often pay for themselves in the current market, or in a worst case scenario, may cost $100 a week (about $5000 a year) after rental and tax income.
However, if the cost of holding an investment exceeds the rental income, buyers can receive tax credit by claiming these deductions, creating what’s known as ‘negative gearing.’
Negative gearing allows out of pocket investors to claim a tax deduction on their holding costs and depreciation. While negative gearing is not the primary purpose of property investment, it is an attractive benefit of modern Australian property investment.
The Property Council of Australia reports two million Australians own aninvestment property, with about 1.2 million using negative gearing.
In short, the costs and growth of owning an investment property (or several investment properties) while renting fare much better in the long term than purchasing a home as an owner-occupier.
The currently booming property market paired with Australia’s rapidly growing population means investors can be relatively confident in achieving significant compound growth.
Compound growth essentially means to create growth on growth. To develop compound growth, investors must apply a system that allows buying a property, seeing growth, withdrawing the equity, then repeating this process.
By buying an investment portfolio first and creating compound growth, investors can afford to buy a desirable home they want in just a few years’ time.
While no one is saying the initial investment purchase is easy, the long-term benefits well and truly outweigh any initial hassles.
First time investor tips
- Look at the bigger picture. A stressful day at the bank is ultimately worth it for the long-term benefits investing provides.
- Expect the unexpected. Make copies of all documentation in case anything is misplaced and need refiling
- Take a (calculated) risk. Your financial situation will not change without taking action.
- Prioritise long term-goals over short-term gains.
- Don’t be intimidated of the unknown.
- Treat investment with the same dedication you would give to study or work.