For a lot of Australians, one big financial goal in life is to save enough for a deposit to buy a property. But many people have to go through several years of renting before they're able to afford their dream home.
But you don't necessarily have to miss out on property ownership while you're renting. In fact, investing while renting can be an effective strategy to help get you onto the property ladder sooner than you think.
Who is this strategy for?
Investing in property while renting may be a better use of your money. Why? Renting often costs less than buying, bearing in mind property ownership can involve paying for strata, maintenance costs and other ongoings on top of the mortgage.
But unlike rental costs, many of those ownership costs can be tax-deductible.
Angie Zigomanis, senior manager for residential property at BIS Shrapnel, says the buy-while-rent method may work for people who have additional funds ready to invest but who are not at a life stage that necessarily requires them to live in the property they own – those who, for example, have yet to start a family.
Zigomanis argues the strategy may also be useful to those with a mobile lifestyle.
“If you travel or are likely to be mobile – moving to other states or countries for work, for example – then you could own that investment without being locked into a location as you would being a property owner-occupier,” he says.
The strategy may also make sense to people who place a lot of importance on their lifestyle and where they live, suggests Peter Koulizos, author and property lecturer at the University of South Australia. People who'd like to live in Toorak, for example, but can’t afford to buy property in one of Melbourne's priciest suburbs, may choose to rent there instead, and buy an investment property they can afford elsewhere.
“If location and lifestyle are really important to you, then that’s certainly a much better option than spending all your money on renting in a blue-ribbon suburb and not having any investment property at all,” he says.
Benefits of buying while renting
One of the key benefits of owning any property is the capital growth potential – that is, the increase in the property’s market value over time.
“Rather than just spending all your money on rent and paying off somebody else’s mortgage, you’re renting a reasonable home while also owning a property that may be going up in value,” says Koulizos.
He also points out the potential tax benefits for property investment – particularly negative gearing in Australia.
BIS Shrapnel’s Zigomanis concurs. He says negative gearing means investors can potentially gain a post-tax return on top of the increase in their property's value – money that can help top up their deposit, for example.
“From a financial perspective, you’re gaining the capital growth in an investment property and at the same time, you have tax deductibility that you don’t have in an owner-occupier property,” he says.
Things to keep in mind
While there are often potential negative gearing advantages that come with property investment, Koulizos notes that investors should also be aware of the capital gains tax (CGT) they may be liable to pay when they sell their property.
By contrast, an owner-occupier does not have to pay CGT when they sell their home.
Another thing to bear in mind is whether you’re prepared to be constantly on the move should you choose to rent.
“The good thing about renting is it gives you flexibility, but the disadvantage is it doesn’t give you any certainty because you can sign a one-year lease, and as much as you love living there, the landlord can tell you after the lease is up that it's time to go - and then you have to go,” says Koulizos.
Zigomanis points out that in Australia, few landlords lease to renters for an extended period of time.
“If the owner needs you to move quickly because your lease is expiring, you may not be able to find your next property at your leisure," he warns. "You may find that you don't end up in your preferred suburb if you get kicked out."
Zigomanis advises that if you do decide to invest in a property while continuing to rent, make sure you can still afford the loan repayments after paying your rent.
Thorough research of the suburbs in which you plan to buy property is also important to the success of any buying-while-renting strategy.
“Arguably, for investment properties now, the banks are a lot tighter in terms of the criteria they require applicants to meet. So you might need a bigger deposit for investment properties than you would for an owner-occupier property.
“Picking the right type of suburb in which to invest should put you on the right path for healthy capital growth,” he says.