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Can I invest my way into a first property in 2021?

December 1, 2020

The simple answer is yes through a process known as ‘rentvesting’, and because of COVID, the timing for negatively gearing into a first home couldn’t be better. 

A recent report from CoreLogic[i] found that COVID-19 may be creating a two-speed rental market, with inner-city rents in Sydney, Melbourne and Brisbane declining faster than those in the outer suburbs.  

Rentvesting is a term coined by the property industry that refers to the circumstances where first-time buyers choose to buy an investment property as their first dalliance with the real estate market, while concurrently renting a home. 

Typically, the rental home will appeal to the rentvestor as it’s either closer to work, the beach or other lifestyle attractions – think here the inner suburbs of our major capital cities. 

As part of the strategy, the rentvestor secures a first investment property further away from the city in more affordable suburbs with longer-term capital growth prospects. Better still, CoreLogic expects rents from properties in outer-ring suburbs to be relatively more robust than inner city investments, a situation that may boost overall returns for rentvestors in 2021. For example, average rental income for houses in the Blue Mountains, west of Sydney, has risen 3.3% since the beginning of COVID, which CoreLogic nominates as the highest increase since the beginning of the pandemic.

However, rentvesting is not a licence to print money and young buyers must be sure to do some legwork before securing a first investment. For starters seek out a property in a suburb or regional town offering the prospect of long-term capital growth. These so-called hot spots might be benefiting from a major government investment in local public transport, schools, hospitals, universities, and other amenities. Sydney's west, for example, is booming as a consequence of the expected long term benefits predicted to be delivered by the massive Western Sydney Airport

Also, as you need decent cash flow from your investment, seek out a first property that produces the best rental return possible. In this sense, if you buy an apartment as part of the rentvesting strategy, be sure to weigh up the strata costs that can take some shine off your rental returns. This might mean buying into an older apartment block that doesn’t have gyms, lifts or swimming pools and as a consequence lower strata fees are levied on owners. Although with older buildings, expenses can be generated by wear and tear that could require special levies. 

That said, as a rentvestor, it's possible to claim the ownership costs as tax deductions. These costs include interest repayments, property management fees, strata levies, landlord insurance, and depreciation expenses. 

If these expenses outweigh your rental income, the tax office lets you offset these losses against other income such as your wage or salary. This strategy is called “negative gearing.” 

For more information about the benefits of rentvesting into a first home in 2021, contact your local Raine & Horne office. 

[i] https://www.corelogic.com.au/news/properties-closer-city-are-more-likely-see-decline-rent-values