Rentvesting is an investment strategy for (usually) first-time homeowners who can't yet afford their dream home but want to benefit from the growth in Australian property market value.
As property prices outstrip wages growth in many parts of Australia, many who hope to benefit from the security of homeownership without sacrificing lifestyle or location are considering alternatives to buying and living in the same home.
This guide explores how rentvesting works, how to weigh the pros and cons, and what you need to be aware of before you purchase a property.
What is rentvesting, and how does it work?
The rentvesting investment strategy allows you to buy in an area you can afford and rent where you want to live.
Rentvesting ideally gives you the best of both worlds. You can rent a property where you want to live (close to work, family or even lifestyle choices like the country or beach) and buy an investment property with high rental income and excellent growth potential.
Many opt to rentvest due to their financial situation—it may be too expensive or competitive to purchase in a highly-desirable suburb. Yet, it is possible to buy in an up-and-coming suburb that's more affordable.
The short-term goal of rentvesting is that an investment property pays for itself through rental income and tax return benefits. The long-term goal for rentvesting is that an investment property also grows in value— capital growth—producing equity to help you build wealth to purchase another home in the future.
Why should you rentvest?
Aspiring homeowners typically discover rentvesting when they start to look at buying their first home and realise how expensive real estate is in Australia.
These people usually:
- Don't have equity from another property that they can leverage.
- Need help saving a deposit and feel like the market is growing faster than they can save.
- Want to live in an expensive metro area to be close to their career, lifestyle, friends and family but can't afford it due to a lower deposit or income.
A property, particularly an investment, usually has two income streams: rental income, tax deductions, and tax benefits, including depreciation and negative gearing.
People who rentvest benefit from a potentially earlier entry into the property market, better affordability and income from their rental property. Rentvesting can also support you in setting up a property portfolio that can benefit you financially in the long run.
For example, if you are buying the home of your dreams, your mortgage repayments may end up at $5000 a month. If you rent a home in the same area, it may cost $2600 a month, leaving you with $2400 a month to invest in a property you buy.
Pros of rentvesting
- You can live the lifestyle you want in the area you love
If the rental prices allow, you can live in an area you want to live in and not have to compromise on location or features. This allows you to be close to your local amenities and places of interest, close to work, close to family and friends or in a bigger home than you may be able to buy.
- You can enter the property market sooner.
Rentvesting allows you to get onto the property ladder sooner, purchasing a home with a deposit you can afford and a home loan that doesn't stretch you as far as your dream home may. This strategy means you don't need to delay your home-buying plan for years while you save your deposit or grow your income.
Buying in regional areas is a much more accessible entry point than the CBD and surrounds in Sydney, Brisbane and Melbourne - this strategy might help you enter the market sooner.
- You can take the time to save a larger deposit.
Buying an investment allows you to take the time to save for your dream home. Another benefit is that an asset is forced savings, as rentvestors will need to ensure they are making repayments on their property.
- You have greater flexibility.
When you rent, you can quickly move homes, or upgrade or downgrade, depending on the circumstances. You don't have the high costs associated with selling if you were to need to do so. You can mix it up and try new things, including locations, types of properties and lifestyle choices.
When you own your home, you have high seller fees and stamp duty costs that make the buying/selling process much more costly.
- Building your nest egg
Because of the flexibility and the joys of rental yields, you can make your money work hard for you and allow your investment to build up wealth that can support you later in life.
- Tax benefits
A variety of tax benefits are associated with owning an investment property. Things like your interest payments and the gap between your rental returns and mortgage payments can be claimed as a capital loss, also known as negative gearing.
- Choose where you invest.
When you purchase a property for investment, you are able to be far more flexible with the property condition, location, layout, and amenity than you are when you're considering buying for yourself.
Factors that typically drive decision-making when you purchase for yourself - commute to work, bedroom numbers, finishes and fittings - are less relevant for an investment property. You are able to be far more objective when buying an investment property: the growth profile of the suburb, typical renter needs, capital investment, and expected return profile. Ultimately, you're able to choose the location based on what works best for your cash flow and the capital growth potential in an area.
Cons of rentvesting
- You are open to the uncertainty of the rental market.
The trade-off of living in the area you love is that the rent may be higher than in a suburb that is affordable to buy in, and rent is higher in more affluent metro suburbs.
Rising interest rates also come with increasing rent costs, which can mean that your rental payments could be comparable to mortgage repayments in a similar area. You will offset some of this with the rentvesting strategy, as your home's rent will likely increase.
- You will miss out on government grants and incentives.
If you don't have the right strategy or meet the requirements of first home buyers grants, you may miss out on the available incentives.
Owner occupiers and first home buyers get government support when buying their first property, including government schemes like the first homeowner's grant and stamp duty exemptions; these are benefits that property investors don't receive.
Knowing your options and weighing the pros and cons to see what works best for you are essential. There are many different government grants across the country, check out our government grants guide to see which latest grants you may be eligible for.
- You don't own your own home.
As much as you love your rental property or the area you live in, it is essential to remember that it isn't your home. This can be difficult when you form an emotional attachment to the home or see it as somewhere you want to live for a long time because, unfortunately, the homeowner can ask you to move at the end of your lease period.
- Loss of capital gains tax (CGT) exemptions
Your principal place of residence (PPOR) carries government exemptions, including the 'main place of residence exemption', which supports if you sell your home, within six years, for a profit. Rental properties are charged CGT if they are sold for a profit. Renting is also overall cheaper as you don't have to worry about paying CGT, solicitors fees, real estate fees or other charges involved with selling a home.
- Fees and costs of owning a home
Rentvesting does come with the responsibilities of being a homeowner. Renters have much flexibility and aren't responsible for the maintenance and upkeep of the structure of a home. Renters can pass issues such as plumbing, electrical and strata fees to their landlord.
When you rentvest, you take on the liability of owning a home. This includes property management fees, renovations when needed, rising interest rates, council rates and unexpected costs that arise with property maintenance.
An investment loan also carries a more significant interest rate than an owner-occupier loan.
Should I rentvest?
If you're prepared to rent for a longer time in the area you love, and purchase in a growth area to capture capital gains, rentvesting may be a great choice for you.
Ultimately, it's important to consider your financial and personal goals, as well as the timeline you have to achieve them when making decisions. In some scenarios, a mortgage broker may be a great resource to discuss your personal financial situation and get impartial advice on your options.
If you're not ready to give up on the idea of owning a home you love in your preferred suburb, there are many other options available to you.