Owning a home is considered an American dream.
Nearly three-quarters (74%) of American adults polled in a study view homeownership as a top hallmark of achieving the so-called American Dream. This beats out:
- the ability to retire (66%)
- a successful career (60%)
- having children (40%)
Only 35% of respondents named obtaining a college degree as a key sign of economic success.
However, the housing market has been on fire in the past two years. Rising demand has sent home prices soaring at a record rate. Though the market has begun to show some signs of cooling, home ownership still remains a lofty milestone for younger Americans to achieve.
This is due to outsized student debt burdens and repressed wages that followed the Great Recession.
With the ever-increasing prices of real estate, it has become extremely difficult for many Americans to gain a foothold in the property market, let alone being able to buy in an area where they want to live.
Rentvesting is an opportunity young Americans can exploit to achieve their dream of owning a house in their desired location. This article tells you how. Read on.
What is Rentvesting?
‘Rentvesting’ is a relatively new lingo in personal finance, but the practice has been around for a while.
The term refers to the practice of living in a rental property while simultaneously renting out an investment property that you own.
Rentvesters rent property they want to live in (but can’t afford to buy) and buy property they can afford (but don’t want to live in) to rent out as investment property. Then along the line, the investment property is sold and the proceeds used to buy the dream home.
Essentially, rentvesters try to balance ‘property affordability’ and ‘quality of living’ without forgoing one for the other.
But is rentvesting a good idea? Here are some key points to think about.
The Benefits of Rentvesting
1. Can still maintain the lifestyle that you want.
Rentvesting makes it possible for you to live your preferred lifestyle or quality of life. At the same time, you get onto the property ladder and create an extra income stream.
2. Rentvesting can help you buy a property sooner.
Rentvesting allows you to buy a property purely from an investment perspective.
By focusing on capital growth and rental yield, as opposed to ‘how much you love the property’, it’s likely you will climb the real estate ladder much quicker. Because you are targeting properties which are cheaper than your ideal house, you would not have to save much for the down payment.
3. Buying an investment property offers tax advantages.
One of the biggest advantages of real estate is that all income from your investment property is tax deductible (eg. home loan interest payments, property maintenance, insurance, council rates, depreciation, etc.).
Therefore, you can use such losses to lower your taxable income from your own wage if your property investment suffers a loss (i.e., the costs exceed the gross revenue from rent).
4. Purchasing an investment property is a smart decision.
Since purchasing a home is a life milestone, the process normally involves a lot of emotions.
However, purchasing an investment property doesn’t include the same amount of emotional involvement because you’re more likely to be concerned with the prospective return on investment (ROI).
The Disadvantages of Rentvesting
1. You still have to live in a rental property.
Your primary abode is still someone else’s rented property and is therefore subject to the landlord’s whims. The owner has the right to raise your rent at any time, sell the property or decide you should move out. You may also have to put up with inconveniences such as house inspections.
Owning a property gives you the freedom to make whatever modifications, additions, or improvements you choose (within reason and legal constraints), something you can’t do as a tenant without the landlord’s consent.
2. Rental prices are rising faster than home prices.
Rental prices in the US are rising faster than home prices.
While you may benefit from high rents, do not forget that you are a tenant and as such would have to cough out more money. As such, if you do not do your cost-basis analysis throughout, you may be operating at a loss.
3. The home might not grow in value.
One of the primary advantages of rentvesting is that you can keep renting as the value of your investment property increases, although this isn’t a given.
There’s always a chance that the property’s value may drop, and you might end up having to sell it for less money than you originally intended.
4. You have to pay both rent and homeownership costs.
Rentvesting is not a cheap choice and becomes more costly over time. This is because you must pay both your regular rent and the expenses that come with owning an investment property. Some examples of these expenses are:
- insurance
- land tax
- council fees
- property manager fees
- repair and maintenance expenditures
Additionally, you usually have to pay for the high expense of locating renters through advertising. Rentvesting requires you to be certain you can afford the expenditures of owning an investment property, in addition to the cost of rent, even if many of these expenses are tax deductible.
So, is Rentvesting a Good Idea?
It really depends on your life aspiration and the level of sacrifice you are willing to make to get ahead in life.
If living in the city is a must for you because of the commute to work, and having your favorite stores around, then rentvesting can be a route for you to own property while living in your dream house.
However, if you are hell-bent on building your financial position as quickly as possible and prepared to make the sacrifices necessary to achieve this, then reinvesting is a good way to get up the property ladder.
If this property grows in value over time, you will not pay any capital gains tax from its sale, whereas the sale of an investment property (as part of your rentvesting strategy) will attract capital gains tax which will, in turn, eat into any profits that you make from its sale.
Read this next: 7 Important Things You Need to Know About Getting a Mortgage
Final Word
Rentvesting is a viable method for improving your position in the future through property ownership while preserving a particular standard of living. The drawback to this is that a strong increase in property prices over the course of your investment is nearly always necessary for this technique to be successful.
Keep in mind that not everyone should use this way of entering the real estate market. Make sure you comprehend the process of real estate investment and decide if rentvesting will be a good fit for you based on your personal time constraints and financial goals.
