More and more Australian first-time homebuyers are looking to rental investment as a stepping stone to realizing their dream homes. Find out if this strategy is right for you.
Housing affordability across Australia has reached its highest level in decades, which should be good news for many future homeowners looking to buy their dream home.
However, in capital cities, where most people work and aspire to live because of the modern conveniences these places offer, the price difference between buying and renting a home remains considerably high.
This price differential gave rise to a savvy investment strategy called annuity, which has gained traction in recent years.
How does rental investment work?
"Basically the rental and investment strategy is to buy investment property first where you can afford it and rent where you want to live, but probably can't afford it", says Michael Yardney, CEO of Metropole Property Strategists, in his Property Update Blog. "It's a tactic that overcomes financial hurdles and sky-high real estate prices, because you can buy in a location that fits your budget, then rent in a location that suits your lifestyle. "
According to Yardney, the strategy works because even if the landlord rents, the house he bought could potentially increase in value, especially if it is in a "smart location", and part of the cost is reimbursed by the tenant.
What are the benefits of the annuity?
1. Up the property ladder earlier
Rentvesting allows prospective homeowners to enter the housing market earlier, as the properties they buy often require a smaller deposit. It's like putting off plans to buy a home by several years to save enough for their dream home.
2. Create an estate to save for the house of your dreams
Real estate investments provide a great opportunity to generate wealth, allowing homeowners to save for their dream home.
3. Live where the action is
Rentvesting allows investors to live where they want and not be limited to where they can afford to live.
4. More flexibility
Since there are fewer conditions, tenants can easily move from one house to another depending on their situation.
5. Tax advantages
The Australian Tax Office (ATO) offers homeowners a range of tax deductions that can help them lower their annual tax bills. Sometimes that could be the difference between positive cash flow and negative debt.
What are the disadvantages of rentvesting?
1. Absence of FHOG
Entering the real estate market as an investor rather than an owner-occupier will mean missing out on the First Home Owners Grant (FHOG), which has strict eligibility criteria.
2. Less security
One of the downsides of being a tenant is that there is less security in their primary residence. They may need to make the property they are renting available for open inspections. They may also need to vacate the property if the owner decides to sell it.
3. Homeownership Costs
Homeowners are often responsible for the costs of managing and maintaining their properties. It can cost them more in the long run, especially if their rental income is lower than the costs of owning a home.
4. Capital gains tax (GCT)
The sale of investment property results in the payment of capital gains tax. In contrast, the sale of owner-occupied properties does not require payment from CGT.
Elements to take into account before making money
As with other real estate investing strategies, rental investing requires investors to be financially prepared. They will still have to spend on the usual costs associated with buying a property, including deposit, stamp duty, IMT, and other legal and banking fees.
Renters should also be able to pay their rent while making sure their monthly mortgage is covered. In addition, there are several costs associated with managing and maintaining their rental property, so it is best to set aside resources to cover them.
Investing in the right place can also pay dividends. Areas with good potential for capital growth are best for investors who invest in annuity as a means of securing their dream home. For those who plan to become long-term tenants, a location with high potential for rental yield is more appropriate.
Top suburbs:
nundah
,
Glendenning
,
Alexandria
,
Tuart Hill
,
melton
Get help with your investment property
Do you need help finding the right loan for your investment?
When investing in a property it is important to ensure that you not only have the lowest available rate possible, but also have the right loan features for your needs.
You only need to fill in a few details below and we will then arrange for a local mortgage broker to contact you and determine the characteristics or types of loans that suit your needs. We'll even help you with the paperwork. In addition, an appointment is free.
We value your privacy and take all your information seriously – you can check
our privacy policy here
