Rentvesting: Buying Where You Can Afford, Living Where You Want

Key takeaways

• Interest on an investment property is deductible; interest on your own home is not.
• You lose the main residence CGT exemption on the property you buy.
• Most rentvesting properties are negatively geared - budget for the monthly shortfall.
• Lenders shade rental income, commonly to 70-80%, when assessing you.

The monthly maths

A $600,000 investment property with a $480,000 loan at 6.5% interest-only, yielding 4.2% gross:

Negative gearing and depreciation reduce that after tax, but the cash still leaves your account every month before any refund arrives.

The CGT consequence

Your main residence is generally exempt from capital gains tax. An investment property is not.

If the property grows $200,000 over ten years and you sell, the gain is assessable. With the 50% discount for assets held over twelve months, $100,000 is added to your taxable income in the year of sale. At a 37% marginal rate that is roughly $37,000 of tax that would have been zero had it been your home.

The six-year absence rule can help if you live in it first and then rent it out - a detail worth structuring around from the beginning rather than discovering at sale.

When it makes sense

Strong case: your work or lifestyle ties you to an expensive area, you would rent there regardless, and buying there is years away.

Weak case: you could buy where you want to live within a year or two, or the cash-flow shortfall would stop you saving anything further.

Run it against simply buying where you want to live later. Rentvesting is a strategy, not automatically the better one.

Frequently asked questions

Can I claim the shortfall against my salary?

Yes - that is negative gearing. The net rental loss reduces your assessable income, so the benefit scales with your marginal tax rate.

Will I still qualify as a first home buyer later?

Generally no. Owning an investment property usually disqualifies you from first home buyer grants and concessions, though a small number of states have exceptions where you never lived in the property.

How do lenders treat my rent payments?

Your own rent is counted as an ongoing expense in the serviceability assessment, while the investment rental income is shaded to 70-80%. Both work against you compared with an owner-occupier purchase.

Related reading

• Reverse Mortgages and the Home Equity Access Scheme
• Bridging Finance: Buying Before You Sell
• Construction Loans: How Progress Payments Work

Sources

• Rental properties guide — Australian Taxation Office
• Capital gains tax and your home — Australian Taxation Office