Rentvesting is increasing in popularity, particularly with first-time buyers. It’s currently the en vogue option in Australia, the alluring alternative to the traditional mortgage model. Many families are jumping on the bandwagon without giving it proper thought and consideration.
Popularity or trends shouldn’t drive your decision, however.
Before you think about getting involved in rentvesting, you need to spend some time in the thinking room. It’s a major financial decision, and it shouldn’t be taken lightly. The following five questions are perhaps the most important you need to answer before getting involved with rentvesting.
Can Your Family Deal with the Uncertainty?
If you are a mum, you certainly want to give your family a warm, welcoming, and stable home. While rentvesting won’t necessarily get in the way of that, there’s some inherent uncertainty that comes with the rental market.
For example, your tenants may miss a rental payment. It can also sometimes be a struggle to find someone to rent your home. On the other side of things, renting isn’t always a picnic. You may be stuck with a horrible landlord. Or they may suddenly decide to sell and you’ll have to uproot your family.
Before you go for the rentvesting option, consider whether it’s the right call for your family. Can you handle the uncertainty this decision may (and often does) bring?
Do You Know the Financial Side?
Buying a property, whether for rentvesting or otherwise, requires a little bit of research into the financial side of things. Personally, doing the calculations gives me a little headache. Let’s just say I wasn’t great at maths back in school…!
But, if you’re going to get involved with rentvesting, you need to get on board with learning the financial side of things. The main component you need to seriously understand is what’s under the hood when it comes to interest rates. Interest is what makes or breaks a mortgage product, pure and simple.
As an example, consider ING Direct, one of the most popular mortgage providers. According to some recent insights, 17% of ING customers are on a 3.38% rate. BUT, the comparison rate is 3.41%.
When I first saw this, I unashamedly explained a big “Huh?”. Basically, the comparison rate is the real interest you’ll be paying, including the nasty add-ons they don’t always tell you about. Comparison rates must be listed by providers (Thanks, Australian lawmakers, for protecting us customers!), so it makes things a little easier. Always, always, compare mortgages based on the comparison rate.
Another major question: if you already have a mortgage and are looking to switch to rentvesting, make sure your lender allows this. You may find that your interest rate will skyrocket if you decide not to live in your property.
What Are Your Long-Term Goals?
The quick buy and flip is difficult. It’s not for the average mum or wannabe investor. For most of us, rentvesting is all about the long game. That’s why you need to think about where you’re looking to be 5, 10, and even 15 years from now. Are you simply looking to get your foot on the ladder by buying a cheaper property? Or are you thinking of becoming a rental property magnate? Each version will require a distinct game plan.
You also need to consider your personal circumstances. Do you have a job that may require relocation? Will your family change in the next few years (with an exciting new addition, for example)? The answers to these questions may affect whether rentvesting makes sense.
Why Are You Doing It?
I’ve mentioned it at the start of this guide, rentvesting is super popular amongst first-time buyers. But that doesn’t mean you should be getting involved in it. Just because something is the right move for someone else, doesn’t mean the same thing applies to you.
Ask yourself if rentvesting is really for you (and your family!). You may find that you’re doing it for all the wrong reasons. It may seem like an easy financial option, a no-brainer. Or your savvy friends may be doing it and you want in on the action. These are not good reasons. Make a judgment based on hard facts, proper calculations, and whether it suits you.
Would an Owner-occupied Mortgage Make More Sense?
Final question: is rentvesting even the right move? The traditional owner-occupied product is the most popular on the market, and there’s a good reason for that. It constitutes a solid financial decision.
Owner-occupied offers several clear-cut advantages. You’ll pay off the mortgage more quickly, as the interest rate will usually be lower. You’ll avoid the dreaded CGT if you’re buying a home for the long-haul. And it’s just a more stable bet for most people. I’m not saying it’s better than rentvesting, not at all, but it’s often the best choice for the average family.
Think Carefully Before Making the Jump
I’m not going to sugarcoat it: rentvesting is not for the fainthearted. It requires a fair bit of flexibility on your family’s part, financial know-how, and the ability to take on the psychological toll of making a big investment.
My advice? Don’t jump head-first into rentvesting.
To continue the aquatic analogy, dip your feet into the water first. Do your research, think about things carefully, weigh up your options, and of course, ask yourself the five questions mentioned in this guide.