You heard the one about the people who own a property but are living in rental accommodation? Why are they paying good rent to a landlord?
The answer is “rentvesting” or “rent-invest” – one of the newest property strategies around.
It is a trend which seems to be catching on in Australia in particular, but is well suited to any part of the world where house prices are increasingly unaffordable.
It is becoming more well-known in the UK.
Typically rentvesting is about buying a place you can’t live in to expedite the time you can afford to buy a place you can live in!
It is where you invest in rental property while renting yourself – where it is financial or otherwise beneficial to do so. The tenant in your investment property pays your mortgage through their rent. You pay the rent of your own rental accommodation.
It can be used by anybody but is considered especially smart for would be first time buyers unable to afford a property in their chosen location but able to buy one in a cheaper location, with a view to selling it at some point and using the proceeds to help with the purchase of a home.
They therefore rent as economically as possible and buy an investment property to grow income and capital – ultimately to be used as their deposit or down payment.
In terms of a catchy description I like “own to own”.
The strategy should be distinguished from rent to buy where a tenant rents a property with the option to buy it for a fixed agreed price within a set timescale.
It is a strategy very similar to buy to let.
Of course, there is no reason why as a “rentvestor” you should only buy one investment property. In theory, the more investment properties you have the greater your income and capital gains – the faster you can buy your own home, if that is your objective.
Benefits of rentvesting
There are many advantages to rentvesting including:
- Accelerating the time it takes you to become a homeowner
- Allowing you to take up a cheap rental option to boost your savings
- Giving you excess rental income to save towards your deposit
- Giving you a capital gain to put towards your deposit
- Minimising the risk of prices accelerating beyond your reach where prices are rising in your preferred location
- Giving you flexibility of movement if you don’t like the idea of being tied down as a homeowner for work or lifestyle reasons.
If you invest in more than one property you can multiply the growth of your income and capital gains.
You have the option to keep renting and carry on owning your investment units indefinitely.
You don’t have to go on to buy your home if your circumstances or preferences change.
Drawbacks of rentvesting
Rentvesting has a number of pitfalls. Renting a property carries the fairly heavy responsibility of being a landlord with an ever growing number of statutory duties.
Fulfilling such duties involves learning, time and sometimes fees to third parties such as, letting agents, managing agents and lawyers.
Issues can arise with tenants including non-payment of rent – which can involve expensive court proceedings with no certainty that you will recover the arrears.
If the tenant does not pay the rent you will need to pay the mortgage from your own pocket – putting a strain on your finances.
When you sell an investment property you will not be able to avoid capital gains tax by way of “private residence relief” or “main residence relief” – however you will be able to benefit from the capital gains tax allowance (currently £11,700: tax year 2018-19).
Section 24 is the legislation restricting mortgage interest relief for landlords from April 2017.
The effect of the legislation can increase your tax or even put you into a higher tax bracket, reducing the rental income available to you in real terms.
It is good practice to seek advice from an accountant as to the possible impact of Section 24 on you if you decide to take up rentvesting.
THE ADVANTAGES OF BUYING
Why become a homeowner (the many benefits enjoyed by homeowners)
Why renting is super stupid (rock solid reasons why you should buy not rent)
Easy home ownership (10 super-powerful reasons for homeownership)
Future of rentvesting
There is every reason to believe rentvesting will become more known and widespread in the UK.
The large industry which has grown around property education and investing is always looking for a “new strategy” to pull in punters and rentvesting very much fits the bill.
It is well known that it is becoming increasingly unaffordable for people of average means to buy in certain parts of the UK; rentvesting could become a widely used way to accelerate savings and raise deposits.
Rentvesting may also grow on the back of changes in employment trends in the gig economy.
Increasing numbers of workers now want flexibility to be able to move around the country and even the world in pursuit of work or in furtherance of their career.
More relaxed and laissez-faire lifestyle choices may also play their part as individuals increasingly opt for the opportunity to select a flexible blend of work and leisure – without being tied down by the responsibilities and constraints of being an owner occupier, especially one with a mortgage.
You might not have known what it was before now, but have you ever thought of rentvesting? It involves some hoops but is it something you think is worth considering? Please leave your comments below.
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Rebel Property Coach
My website is: www.rebelpropertycoach.com