Could Rentvesting Work for You?

key, house, house keys

Rentvesting is when you rent a property in the area you want to live in, while investing in a separate property in a location that better suits your budget. With rentvesting, you don’t have to own your own home before investing in property, giving it wide appeal. It’s an investment strategy that is especially attractive to young people and aspirational families, who don’t want to sacrifice their lifestyle while building their future wealth.

There are potential downsides, of course. You may miss out on the first homebuyer grant, and (unlike someone owning their primary place of residence) you are subject to capital gains tax when you sell.

You also become a renter and a landlord at the same time, which has its own financial considerations. You have no security of tenure in your rented home, and all the responsibilities of financing and managing your investment property.

But done well, it can mean you enter the property market and start your investment portfolio, without having to sacrifice your lifestyle to do so.

Short Summary

  • It’s also worth noting that the most successful rentvestors generally follow a strategy mapped out by experts in property investment. There are just too many variables to leave it to chance. When you consider Australia has up to 80 distinct property markets, all growing at different rates, picking your investment property with a pin is definitely a risky way to proceed. 

  • It’s important to get professional help in building a strategy that works for your current financial situation and goals. 

  • Here’s an overview, some examples of what rentvesting might look like and the rentvesting pros and cons.

What is Rentvesting? 

Ientvesting, meaning you rent in an area where buying is out of reach then purchase an investment property to suit your budget, is an alternative to the traditional model of owning your own home before you buy an investment property.

You can choose a rental property you can’t afford to buy, say in the inner or middle suburbs. This satisfies your lifestyle needs, as you are close to all the amenities you value.

You can then select an investment property in the growth corridor of an up-and-coming regional area, for instance, or a new-build in an outer suburb with plenty of infrastructure projects underway.

You are able to choose a more affordable and cost-effective long-term investment property, with no emotions getting in the way. That property could fund your dream home down the track, or be the start of a property portfolio. Alternatively, you can buy an investment property you would like to live in later on, when you are growing your family or opting for a quieter lifestyle.

When compared with purchasing your own home, rentvesting may require some additional upfront money, depending on the location you want to live in. You will have to cover your rent as well as mortgage payments, while meeting other investment property costs such as management fees, maintenance and rates. It’s worth noting that the right choice of investment property can significantly reduce your maintenance costs, in some instances making them negligible.

Other potential issues include problems with tenants, and no guarantee that your investment property will go up in value. It’s important to weigh up these variables, then work out if rentvesting suits your budget and circumstances.

So, when is a good time to property invest?  At Strategic Investors we focus on building a robust and implementable property investing strategy.  We take into account your current financial position, your lifestyle, your age, your risk profile and much more.  From our experience, it possible to invest even with high interest rates and inflation rates.

Once established, and allowing for teething problems, rentvestors can go on to acquire multiple properties. This can help them build sufficient wealth to buy their dream property down the track. Once again, however, this tactic is not for the fainthearted or the inexperienced. A sound, proven investment strategy is required to get you there. Caution and due diligence are critical before embarking on such life-changing pathways.

What rentvesting looks like in practice

These three examples give you an idea of how rent vesting might work for you.

Sydney, young couple wanting to grow

You are a 30-something marketing professional, enjoying life with your partner (an IT worker) in an inner-city Sydney apartment. You’d love to settle in your current suburb, but home prices are way out of reach. You decide to keep renting, using the money you’ve saved as a deposit on a more affordable investment property in a regional growth corridor. This is just the start. You plan to add an investment property to your portfolio every one to two years, which can eventually be sold to fund your city dream home.

Melbourne, married with child on the way

Melbourne offers all the lifestyle choices you value. Newly married, you are renting a small terrace in a bayside suburb close to your workplaces (you are both teachers).

Your current home has all the space you need for one or two children, though your heart is set on a large family living in a spacious home with plenty of garden.

You decide to stay put while investing in a larger home further down the coast, which you can move into later on, or sell to help fund your ideal home

Brisbane, young, single, no immediate plans

You live in the city, have a great job in hotel management, and share a waterfront rental with two friends. Life is good and you don’t know where the future will take you. You like the idea of being a property investor, but can’t afford a deposit in any of the areas you want to live.

You decide to rentvest instead, buying an investment townhouse in a new-build development in an up-and-coming suburb. This is an affordable option, with top depreciation and minimal maintenance. You also retain flexibility and the lifestyle you love.

Balancing the books on rentvesting

Things to note:

  • You can compare renting and buying costs on similar properties in, say, inner Melbourne. Let’s assume you can afford monthly mortgage repayments of $3,300. If you rent an equivalent property at $1,825 per month, you can invest the remaining $1,575 in a rental property.
  • Rentvesting works best when there’s a big gap between monthly mortgage repayments and rent payments. Where they are around the same, in the location you prefer, it won’t be as cost-effective.

Using rent vesting to grow your portfolio

Rentvesting could also kick-start your property portfolio. By ensuring the rent you receive for your rentvestment property is larger than the amount you repay on your mortgage, you can build capacity to buy yet another property. As REIWA states, this gives you extra income, freeing up funds for the next purchase – and making you look better on paper when you apply for your next loan.

Rather than backing away from borrowing, you can learn how to leverage it. With the right knowledge, and a sound property investment strategy, you can make smart rentvesting decisions which help build your wealth over the long-term.

Find out your borrow capacity

Rentvesting pros and cons

As with any property investment strategy, there are rentvesting pros and cons. It’s important to compare the benefits of rentvesting with the drawbacks.

Your lifestyle, income and goals will all help determine whether it’s the right strategy for you. The numbers need to stack up, so it’s vital to do your homework.

Before embarking on any property investment crusade, it is vitally important that you do some serious self-reflection to truly understand oneself before embarking on property investing or purchasing your home.

It is suggested that you do a few basic personal assessments that not only be interesting but beneficial to ensure you make the right lifetime decision.

As a minimum, we would recommend you;

  • Work and document your personal goals
  • Undertake a risk profile assessment
  • Prepare a short-term and long-term strategy
  • Detailed personal financing and budgeting
  • Speak to a number of wealth investments

Potential benefits of rentvesting

Dream home
Potential rentvesting tax benefits
Live, rent and grow your career in the location of your choice, even if you can’t afford to buy there right now without a hefty mortgage commitment.
Why wait? Get on the property ladder more quickly, putting down a smaller deposit. You can upgrade to your dream home, in a prime location, later on.
You’re not giving up the dream. You can go on saving for the perfect home, enjoying a rental income, while living the life you want right now.
Rentvesting offers you real flexibility to upgrade or downgrade your rented property, as circumstances dictate. If you change or lose your job, you can change your rented property to suit.
You can transfer your home between cities, states or even countries, without the red tape and high costs of buying and selling property. It won’t affect your investment.
Choose the location of your investment property based on sound economic factors, to suit your budget. Professional property investment advisors can help you optimise capital growth, yield and other key buyer considerations.
Maximise your tax deductions, depreciation and negative gearing to give you good cashflow. By offsetting your mortgage repayments more effectively, you may also be able to increase your borrowing capacity.
If you buy a ‘fixer upper’, you pay less upfront and give yourself scope to increase its value. The right renovations can help grow your equity, increase the rent you charge and potentially boost capital growth, as well as giving you plenty of tax deductions.

The possible drawbacks of rentvesting

FHB benefits
Capital gains
Dead money
Buying an investment property first can be more expensive, as investment loans tend to have higher interest rates.
Buying an investment property first can be more expensive, as investment loans tend to have higher interest rates.
When you sell your principal place of residence, you are exempt from paying capital gains tax on any increase in value. However, when selling your investment property, you will be taxed on the profit.
The money you pay your landlord is known as ‘dead money’, because it builds value for them and not you. While rentvestors still receive a rental income, remember you will be handing over significant rental payments while also meeting all the costs of an investment property.
When renting, you are not free to renovate, adapt or add assets like solar panels to the property. The landlord may also ask you to leave a property you have become emotionally attached to.

The rentvesting process

  • Researching the national property market.
  • Identifying prime current and future growth areas.
  • Comparing rental yields and potential capital growth.
  • Finding out how much you can afford using real estate tools available.
  • Securing your finances, then finding and buying the right property.
  • Employing the right property manager to protect your asset.
  • Working out how and when you’re ready to go again.

Final Say

It’s hard to do all this on your own. Successful rentvestors benefit from strong property investment strategies, based on proven ‘get rich slow’ wealth acquisition.

So is rentvesting the right strategy for you?

It depends on your goals and your financial circumstances. Like any property investment strategy, it comes with potential risks and potential rewards. So do your homework first, and if you decide to dive in, get a professional team of advisors together to guide you along the way.