First-time buyers have taken over the property market in Australia after the COVID-19 pandemic, seeing incredible growth rates when the expectation was that the property sector would suffer greatly.
However, due to the growth in house prices in recent years, home buyers are being priced out and might potentially feel their dream home is out of reach. Some Aussies may be looking at alternative strategies to work their way up the property ladder.
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Rentvesting, Renting, Buying – the difference for you?
‘Rentvesting’ – purchasing an investment property inside your budget and renting your dream house – is a practise that has been around for years, but with the post-COVID property bubble, this strategy is gaining traction.
Renting is where you rent an apartment or house and you pay the owner of the property money every month or week, whatever the agreement is, to live there. The money you pay is called “rent”.
Buying your home is one of the most expensive investments you will ever make, this is where you own the entirety of your home. If you buy an apartment fees differ as you need to pay strata on top of other bills that are common with a home.
For Australian Millennials, the traditional strategy of home ownership is instilled in us from a young age – in our parents’ generation, owning your own home was just “what you did.”
Some Aussies may find the ability to have their own place and detail it any way they find appealing, but some could be wondering if buying a home and dealing with a massive mortgage is really a smart play for their future.
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Renting, is it for you?
A common belief when renting a home is that you’re spending dead money or just paying off someone else’s mortgage – there is some truth to this but also another side. The average rent payment is a significantly lower than a mortgage repayment and other costs on the property, so in turn you could have additional savings leftover due to renting.
When renting in the home you want to live in will allow you to use your savings to purchase a different investment property, perhaps one with a higher valuation that will grow faster because it is more costly.
This is where rentvesting comes into place, as all the money you have accumulated in your savings by renting now could allow you to buy yourself an investment property.
As a common example, if your ultimate goal to buy a $1.5million property is out of reach right now, you could buy an investment property for $750k for now, and then in a few years could buy another investment property for $750k. If they have increased in value, you should be close to sell both properties and afford the home you really want.
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But what is the ultimate different between renting and buying?
Under Australia’s tax laws, paying mortgage interest and property costs like strata isn’t tax deductible on your own home, but it is on investment properties. So, if you wanted to buy the same property as your own home vs. as an investment, the after-tax cost will be different.
Many other factors are taken into account for your after-tax cost, but there is a difference between your own personal home and an investment property.
With buying your own home, it is also believed to be appealing as your home is a big asset you have behind you. While there is some truth to it, if you intend to live in your home forever you won’t be reaping any financial benefits from it.
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How to determine what is right for you?
There are many factors to consider when trying to determine whether renting is better for you than buying a property. You don’t need to believe the common opinions about which one approach would best suit your needs.
Ultimately, it depends on your financial situation now and how it will change in the future. A property purchase is a long-term investment, the upfront fees are greater than in the long run.
Try not also let your emotions cloud your choices, your feelings are important – however, you don’t want to purchase something based on how you feel and then realise you haven’t calculated the numbers correctly.
There are many misconceptions about buying a property and the best way to debunk them is by doing research. If you have any questions and if you need help with your home loan, give eChoice a call! Our experienced brokers can help with finding the right loan for you and your situation.
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Words by Ece Demir
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