The Australian Dream is becoming a distant memory for many people who no longer believe owning a home is attainable. With property prices having soared in recent years, people are establishing other home-owning strategies to reach their goals.
We are seeing rentvesting become a progressively popular home-owning strategy.
What is it?
Rentvesting is a strategy in which you purchase an investment property in an area that fits within your budget whilst renting a home in which to live in an area that suits your lifestyle.
People are having to choose between entering the property market and settling on their location or continuing to rent while saving for a large deposit that continues to grow. With rentvesting you can enter the property market while continuing to enjoy your lifestyle.
Lilly is currently renting an apartment in Paddington, Sydney. Lilly enjoys living in proximity to the city where her work and day-to-day activities are only a short distance away.
Lilly has been saving for a home loan deposit, but due to high property prices has not been able to purchase a home within her budget in Paddington or surrounding suburbs.
Lilly decides to purchase an apartment in North Ryde and rents it out, while she continues to rent her apartment in Paddington.
The rental payments from the property help Lilly pay the mortgage while increasing her equity.
It’s important to note first home buyer grants are not available for investment properties. Recipients of first home buyer grants must live in their newly purchased home for a minimum period of twelve months before the property can be used to produce an income.
Rentvesting holds more valuable benefits other than home ownership, here are some of the key benefits of rentvesting:
- Negative gearing
Negative gearing is when the cost of a rental property outweighs the incoming rental payments. This is not a bad thing, as one may initially believe.
When negative gearing occurs, the investment property owner can claim the loss against their personal income for the year, lowering the investor’s taxable income.
- Building equity
A property will build equity over time when you pay down the home loan and through capital growth.
The amount of equity is the difference between the value of the property and amount owning on the home loan.
The equity can be used to borrow additional funds for a variety of reasons, including property purchases, renovations, or other investment opportunities.
In Lilly’s case this could assist her in purchasing a home closer to her preferred location in the next few years once the investment property builds equity.
Depreciation is one of the biggest tax benefits available to property investors.
Depreciation is the natural wear and tear of a property and the assets within it over time. The Australian Taxation Office allows owners of income-producing properties to claim this depreciation as a tax deduction. Depreciation can be claimed on capital works (Division 43), the building’s structure and permanently fixed items, and plant and equipment (Division 40), the easily removable or mechanical items.
One great component of depreciation is you don’t need to pay any additional expenses to claim as it’s a ‘non-cash’ deduction. This is different to other deductions like property management fees and interest repayments as money needs to be spent in order to claim.
Living the best of both worlds is possible with rentvesting. Organising a tax depreciation schedule will ensure you receive all available depreciation deductions.
BMT Tax Depreciation finds clients an average of $9,000 in the first full financial year deductions. To learn more about rentvesting contact BMT, the depreciation experts, on 1300 728 726 or request a quote.