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What is rentvesting?
Rentvesting is a home ownership strategy for people who want to enter the property market but can’t yet afford to buy their dream home.
The approach is popular with the younger generation who are finding it harder to purchase a property to live in, as costs of both property and living continue to rise.
How is rentvesting different from traditional homeownership?
Rentvesting and traditional homeownership represent two contrasting approaches to property ownership. In rentvesting, you opt to live in a rental property while simultaneously owning an investment property elsewhere. Traditional homeownership, on the other hand, involves residing in a property you own.
The main benefit of rentvesting is that it allows you to live in a location that suits your lifestyle while investing in a property where it makes financial sense. Purchasing a house in sought-after suburbs or metropolitan areas can be out of reach for many, making rentvesting an attractive option for both convenience and entry into the property market.
While both rentvesting and traditional homeownership involve purchasing a property, they have different objectives. Rentvesting focuses on building wealth through property investment with the potential for rental income and long term capital growth. On the other hand, the primary goal of traditional homeownership is not wealth generation. It involves property ownership for personal use and stability, but there may be potential capital appreciation over time.
Rentvesting could also be a means to traditional homeownership. As you potentially build wealth through rentvesting, you may eventually have the financial means to purchase a property where you desire for personal use. Therefore, rentvesting could help bridge the gap between renting and owning while allowing for a flexible lifestyle.
How to rentvest
Rentvesting involves renting a property where you want to live (such as the city) and buying an investment property where you can afford it (such as a rural suburb).
Instead of sitting unoccupied, you lease the investment property out to tenants and use the money this generates to cover some or all of the ownership costs. If you can earn a profit on your investment property, even better - you can put this extra income towards paying your own rent and/or saving up a deposit for your dream property.
Rentvesting may work best in locations where the difference in rent payments and mortgage repayments is substantial rather than almost the same.
Why rentvest?
While you might end up spending the same amount if you just rented or just lived in the home you own, rentvesting gives you the opportunity to live where you really want to while still getting your foot on the property ladder.
Rentvesting is meant to be a temporary option. The idea is that in, say, five or 10 years, the buyer will be earning a higher salary, which will allow them to buy an owner-occupier property in a suburb where they actually do want to live.
Hopefully, in those five or 10 years, their investment property would have significantly increased in value, and a big chunk of the mortgage would have been paid down. That would allow the buyer to draw out some equity to help fund their second property purchase. Another fundraising option would be to sell their home.
Who does rentvesting suit?
While technically anyone can rentvest if they have the means and motivation to, it may be more appealing for certain people, such as those who:
- Move around a lot for work
- Like to travel for long periods at a time
- Prefer the flexibility of renting (which eliminates buying and selling fees)
- Want to live in upmarket suburbs or near entertainment hubs that are out of their buying budget.
Rentvesting pros and cons
As with any financial strategy, there are advantages and disadvantages that come with rentvesting. We break them down below so you can weigh them up.
In addition to entering the property market sooner rather than later and helping you save for your dream home, here are some of the benefits of rentvesting:
Live the lifestyle you want
Instead of living in a home you can afford but that doesn’t make sense for your lifestyle, you can rent somewhere that ticks all your boxes for work, hobbies, safety and security, local amenities etc. until you can afford to buy there. No sacrificing lifestyle necessary.
Grow your wealth
Rentvesting allows you to start building your investment property portfolio, which can ultimately generate wealth and help you build up your retirement nest egg.
Less responsibility
When you rent, your landlord is usually responsible for maintaining the property. This means you don’t have to worry about sorting out any issues to do with things like electricity or hot water. You shouldn’t have to pay to get them fixed either, as the cost will come out of the landlord’s pocket, not yours.
Flexibility
Renting can make it easier to upsize or downsize if your circumstances change, as you don’t have to go through the process of selling your home and buying a new one. On a similar note, renting gives you the freedom to move around for work or for a change of scenery without significant expense. It also gives you the opportunity to experience living in different places and property types, before settling on one when you buy your own home down the track.
Tax benefits
Another potential pro of rentvesting is that you may be able to claim tax deductions on your investment property that you wouldn’t get when buying a house to live in. This can include the interest charged for loans, rental costs like insurance and advertising, depreciation costs, and in some cases any new fixtures and fittings that have been added to the property.
Potential capital gain
If your investment property increases in value, you may be able to sell it down the track for a profit. You may also be able to use the equity in your property to secure additional credit to help finance any future plans you may have.
Let’s not forget the downsides. Here are some reasons why rentvesting may not be the best option:
Buying an investment first
Purchasing an investment property before your own home can seem counterintuitive to many people. On top of this, investment loans tend to have higher interest rates, which can burn a hole in your wallet if you’re not prepared for it.
Loss of full capital gains tax (CGT) exemption
Most of the time, your principal place of residence carries a full exemption of any capital gains tax liability if you sell the property for a profit. For investment properties, it’s another story; this means if you end up selling yours, you’ll generally need to pay tax on any capital gains.
Losing first home buyer benefits
As a rentvestor, you won’t be able to access first home buyer grants that are issued by state governments for certain home buyers who will occupy their property for the first year. This said, you could consider buying the property as an owner-occupied home, living in it for the required period to fulfill the criteria of the grant, and then renting it out.
It’s also important to keep in mind that you likely won’t qualify for first home buyer support when you do buy your dream home, as you’ve already bought one for investment purposes.
Dead money
As a renter, you’ll still be paying money to have a roof over your head that isn’t going towards owning the home you live in. The age-old saying ‘rent money is dead money’ may be a deterrent for some people considering the rentvesting approach.
Lack of control
As we just mentioned, you don’t own the home you’re living in. This can be difficult if you form an emotional attachment to it but then the landlord asks you to move out. You’ll also have to make the property available for inspections, and give up some of your privacy.
In addition, you usually can’t modify rental properties. This means you can't make the place 100% your own, which can be disappointing and limit your creativity.
Peer pressure
Rentvesting goes against the entrenched norm in Australia of living in your own home, so you may receive some judgment from family and friends if you decide to rentvest.
Potential capital loss
If you decide to sell your investment property and it’s decreased in value since you bought it, you’ll experience a disappointing loss.
Before you begin rentvesting
If you decide that rentvesting is an avenue you want to go down, there are some things you should have covered before you make a move.
Have a solid strategy in place
It’s imperative that you do your research and create a comprehensive strategy before you make the property plunge. If you’re not sure where to start, you can seek out a professional to guide you in the right direction. If you don’t have the time to complete the task, you can always engage an expert to do it for you.
Get a property manager
While you may want to take the reins and do everything yourself, it can be a lot of time and energy managing your investment property. Hiring a property manager can save you the heartache and hassle of doing it on your own. A rentvest property manager is also particularly important if your investment property is in another state to the one you live in.
Is rentvesting a good idea?
If you’re asking yourself ‘is rentvesting worth it?’, this ultimately comes down to your personal and financial goals, and whether you have the means to make it work. Since this is a serious financial decision, make sure you take the time to crunch the numbers and speak with an expert to get a professional opinion on whether a rentvesting strategy would work for you.
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