Over the last decade, renting whilst investing in property has seen a significant boost in popularity. The traditional method of first buying a home and then later investing in a second property is on the decrease as more and more generation y-ers are entering the property market.
The are many pros to investing while renting, and it’s a popular option for the younger generation who don’t tend to like committing to one location.
The Pros
Cash flow: Renting can be cheaper and assist with cash flow, especially if renting with other s and you can split rent and bills between a few tenants. It allows you to free up your cash flow and save more money for a deposit for an investment property. But it’s not just the flexibility of sharing that helps with cash flow. Mortgage rates tend to be higher than rental yields, and landlords tend to retain other costs as it’s tax deductible for them. With renting you don’t need to pay for maintenance and other household related costs, and any of these costs incurred from being the landlord of an investment property are tax deductible.
Flexibility of Location: One major pros of renting whilst investing, is the opportunity to change locations of rentals when job commitments or family commitments come knocking. Most rental properties in Australia have 12 month leases, which means you aren’t locked in to one place for too long. Another advantage is that you can live in some great suburbs that would otherwise be unattainable when buying.
Tax Benefits: The biggest advantage is negative gearing, which is when the money you borrow to buy an investment property, and the income generated by that property does not initially cover the interest on the loan. The advantage of this is you can offset this against your income and therefore secure yourself a tax saving. You can also claim things like depreciation on fittings and fixtures, which increases your tax savings.
Whilst there are many advantages to renting whilst investing, it’s not for everyone. There are risks involved too.
The Cons
Insecurity of Renting: With renting comes the risk of owners wanting to sell, move back in or renovate the property you’re currently renting. This can be a disadvantage as you may need to move more often than you planned to. Some people also want the security of owning their own home, and being able to renovate and decorate it as they please, whereas this can be very difficult when renting.
Vacancies – Cash flow could be a problem when there are times your mortgage payments will need to be covered out of your own pocket due to your property having no tenants. This could just be a result of a gap between tenants or because of maintenance issues. There is also the risk of having bad tenants, who could potentially damage your property, refuse to pay rent and refuse to leave. Disputes can sometimes take months to resolve.
Putting all your eggs in one basket and rising interest rates – if you have all your money tied up in property, overexposure to one particular type of investment can be a dangerous thing. If the property market crashes you can stand to lose significantly. If your investment loan has a variable interest rate, there is always the risk of economic conditions causing interest rates to rise.
If you are looking to invest in property, or have any questions, contact us at ourteam@azuregroup.com.au.
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