Rentvesting vs. Rent-to-Own

Rentvesting vs. Rent-to-Own: What's the Difference and Which is Better?

Guides
Home Ownership
by
Dawn Teh

With Aussie house prices steadily rising over the years, entering the real estate market can feel increasingly difficult if you're a first-time home buyer.

Many young Australians are forced to either rent or live with their parents for longer.

But others are also exploring non-traditional paths towards homeownership — including rentvesting and rent-to-own.

While they may sound similar, they're totally different real estate concepts.

To put it simply, rentvesting involves investing in a property you can afford while renting in an area that you actually prefer to live in. 

People use this as a way to continue living in a more expensive area while still having a foot in the property market by buying in a more affordable suburb.

On the other hand, rent-to-own is an arrangement where tenants lease a property from a landlord for a specified period of time with the option to purchase the property later on. 

That's just a quick explanation of both concepts. But there's much more to know about rentvesting and rent-to-own in Australia (especially the pros and cons of each)!

So keep reading to discover which is the better option for you.

Disclaimer: This article is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer documents before making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).

Quick Comparison: Rentvesting vs Rent-to-own 

Bear in mind that we are specifically referring to the rent-to-own pathway we offer at OwnHome. It may not be reflective of other rent-to-own programs.

Rentvesting Rent-to-own (OwnHome)
Move into your dream home now Yes, you rent your dream home while investing in another property Yes, but you'll be renting at the start
Upfront costs Deposit for your investment property 3% deposit for the rent-to-own agreement
Build up security deposit while you stay No Yes
Fixed purchase price Fixed
You'll be purchasing your investment property from the start
Fixed price when you decide to buy your home later
Ongoing payments Rent for the home you're living in
Mortgage repayments for your investment property
Strata fees
Home maintenance
Council rates
Property management fees
Fortnightly payments with part of it going to your security deposit
The deposit can be used when you buy your home later
When is the home in your name The investment property is in your name from the start Only when you decide to buy it 2-7 years after the start of the agreement
Property buyback costs You won't need to buyback your investment property The usual property purchasing costs (20% deposit and other fees)
But you can use your security deposit to offset the purchase price
If property value appreciates, you get to keep the upside

What is rentvesting?

Rentvesting is purchasing property to lease out in an area you can afford while renting another place (usually in a pricier suburb) that you actually want to live in.

A classic scenario would be renting and living in capital cities (like Sydney, Brisbane, or Melbourne), but buying and leasing out an outer-suburb property. 

The main benefit of this investment strategy is that it allows you to start climbing the property ladder in an area you can afford, while still maintaining your lifestyle by renting in a pricier area.

The rent from your tenants helps to cover the mortgage on your investment property. 

Sometimes, the rental might not be enough to cover your monthly repayments. In this case, you can use the deficit to lower your taxes. 

But, if there's any leftover income, it could be used for other purposes, such as savings or investing in additional rental properties.

Rentvesting Example
Let's say you want to live in an inner-city area like Sydney, but property prices there are out of your price range at the moment.

Instead of buying a home there, you buy a property in a more affordable suburb like Box Hill but continue renting in Sydney.

You lease out your Box Hill property and use that money to pay off your home loan on that property.

This allows you to still live in your dream area (Sydney), while still having a foot in the property market in Box Hill.

What are the pros and cons of rentvesting?

Pros:

  • Maintain the lifestyle you want: Rentvesting allows you to continue living in an area you want.
  • Make your money work for you: Rentvesting lets you build your property portfolio from the get-go. Instead of simply renting (which is "dead money"), you're investing in another property at the same time to take advantage of capital growth (when your property value increases over time). 
  • Flexibility: Rentvestors have the flexibility to move more easily if their situation changes, without having to sell their investment property.
  • Tax benefits: Property investors can use asset depreciation and negative gearing (when you're making a loss from the property you're renting out) for tax deductions. 

Cons:

  • You're still living in a home that's not your own. You might be in your ideal suburb, but you can't really live like a homeowner in a rental property.
  • You still need to save up for a substantial deposit: To make your investment property worthwhile, you must ensure that you have a substantial deposit (usually 20% of the purchase price). This is so that you don't have to pay lenders mortgage insurance (LMI) and negotiate for better interest rates. 
  • You may end up paying more in total for both rent and a mortgage if your rental yields are too low.
  • There's always a chance the value of your investment property could go down. While you might feel that real estate always goes up in the long term, there’s still the risk of it going the other way.
  • There are many things to juggle administratively and financially. You have to make sure you have enough cash flow (i.e. ensuring that you always have a tenant) to cover the mortgage payments, property management fees, and other outgoings. You'll also have to have enough to pay rent for the place you’re living in.
  • You'll need to pay capital gains tax (CGT) when you sell your investment property. This tax does not apply to owner-occupied property.

How do I start rentvesting?

Here’s a step-by-step guide on developing your rentvesting strategy:

1. Create a budget: Be realistic about how much you can afford to invest and make sure you're able to put down a big enough deposit. You need a deposit that's at least 20% of the purchase price to avoid paying LMI. 

Don't forget to factor in all the associated costs (e.g. stamp duty, property management fees, council rates etc.).

2. Find the right property: Remember, you're ultimately looking for a property that's easy to lease out, not live in for yourself. So be strategic about your purchase. 

Think about what's rentable rather than what you look for in a house personally. Ask yourself what potential renters in the area are looking for in a home. The needs of young couples may be very different from a family. Doing your homework at this stage will pay off in the long run.

3. Get professional advice: It’s always a good idea to seek professional advice before making any big financial decision. A qualified financial adviser can provide tailored advice based on your unique circumstances.

4. Review your situation regularly: Once you’ve jumped into rentvesting, it’s important to keep tabs on how your investment is performing. Review your budget and rental income regularly, and make adjustments as needed. 

Can I access first home buyer grants while rentvesting?

Unfortunately, you won't be able to access government first home buyer grants or schemes when you're rentvesting. 

This is because these programs usually require applicants to be owner-occupiers of the home they're purchasing. 

If you're buying with the intention of using it as an investment property, you won't be eligible for the grant.

What is the concept of rent-to-own?

With rent-to-own, you essentially agree to rent the property for a set period of time with the intention of buying it in the future at an agreed-upon price. 

This can be a great way to get your foot in the door of homeownership if you cannot get a traditional home loan. 

How renting-to-own works with OwnHome

At OwnHome, we reduce the barriers to homeownership through the rent-to-own pathway. Our company is also backed by the Commonwealth Bank.

Here’s how it works:

  1. OwnHome buys your perfect home. You move in right away and start treating it as your own. The upfront cost for you is just 3% of the purchase price.
  2. Pay rent to OwnHome fortnightly. Some of this payment goes towards your security deposit. 
  3. If you still like it, buy your home from us after 2-7 years. The purchase price is fixed from the start of the agreement. And, your security deposit can be used when buying your home. (If the true market value of your home is more than OwnHome's fixed price, you keep the upside.
Example
OwnHome buys your ideal home for $1,000,000. You begin staying there and pay fortnightly rent to OwnHome. Some of this money goes towards building your security deposit (which you can use later to buy your home from us).

The value of the property will go up at a fixed rate. After 2-7 years from when you signed your OwnHome agreement, you can buy your property.

Let's say 5 years have passed since the start of the agreement. The property purchase price has increased to $1,200,000 at the set rate.

At the same time, you've accumulated $150,000 in your Security Deposit.

This means you only need to get financing for $1,050,000 to buy the property.

Additionally, if the true market value has increased over OwnHome's pre-set price, you keep the upside too!

Remember, your purchase price is now $1,200,000. But if your home is valued on the market at $1,400,000, you keep the extra $200,000.

Essentially, your equity in the home is $350,000 ($150,000 in security deposit, and $200,000 of capital gains).

This means you'll secure $1,050,000 of financing with a loan-to-value ratio (LVR) of 75%.

(The LVR is simply the loan amount divided by the value of the home)
Key Term
Security Deposit

Whenever you make a fortnightly payment to OwnHome while renting from us, about 35% of it goes to your Security Deposit. This deposit will be taken off your home's purchase price when you buy it from us.

Pros and cons of rent-to-own with OwnHome

Pros

  • No need for a 20% home deposit — just 3% to get started! 
  • Start living in your dream suburb and home immediately
  • We almost always approve renovations and touch-ups. Start living like a homeowner. 
  • You can build up your security deposit while living in your home — for each fortnightly payment, about 35% is added to your security deposit. 
  • Fixed purchase price when you decide to buy your home from us. There won’t be surprises.
  • Potential capital gains. If the value of your home goes up, you keep the capital gains above OwnHome’s fixed price.
  • OwnHome covers strata levies and certain maintenance costs while you’re in the rental phase.

Cons

  • You only own the property when you buy it from OwnHome. Before that, you’ll still be renting from us even though we give a lot of liberty regarding renovations. 
  • The property value could drop below the fixed purchase price (but you can walk away from the agreement, which isn't possible with a mortgage).
  • We have several eligibility criteria applicants need to meet. For example, Our service is unavailable to those who want to buy investment property. 

Can you still use the first home owner grant with OwnHome? 

Choosing OwnHome's rent-to-own pathway will not disqualify you from accessing the first home owner grant when you decide to buy your home from us. 

Should you rentvest or rent-to-own? 

Whether you should rentvest or rent-to-own depends on your goals and needs.

They're both similar in the sense that you get to start living in your dream home from the get-go. 

But they're different in the way they help you to reach your longer financial and property-ownership goals. 

Here are some questions to help you decide which is better for you:

  • What are your overall goals? 

Is it to live in your dream property now and start treating it as your own? Renting-to-own with OwnHome allows you to renovate and behave like a homeowner. 

With rentvesting, you're still constrained by tenant rules and regulations. Your landlord may suddenly decide to break the lease and you'll have to move out of your dream home.  

On the other hand, if your main aim is to start building equity in real estate as soon as possible, then rentvesting might do that better for you than renting-to-own. You only start owning property when you buy it later with rent-to-own pathways.  

  • What's your risk appetite?

While both cases involve some level of financial risk, the nature of the risk is different. 

There are quite a few aspects to juggle with rentvesting. As a property investor, you've got to have enough cash flow to pay off your mortgage. This means ensuring it's always rented out and keeping other maintenance costs low. 

Always think of the worst-case scenario and ask yourself if it's something that you're comfortable with. 

For example, consider if you lose your job, can't find a tenant for your investment property, and the lender is unable to recover the debt from the sale of the home. What would you do?

With OwnHome, the worst-case scenario would be if the value of your property drops below the OwnHome price. 

If you decide to end your contract, you only lose whatever rental you've paid to OwnHome but you're not stuck with debt.  

  • How much of a deposit do you currently have saved up?

Rentvesting only really makes sense when you've got a substantial deposit built up to buy your investment property. 

Anything less than the usual 20% deposit and you'll be paying for additional costs like LMI and higher interest rates. This would ultimately defeat the purpose of an investment property. 

For OwnHome, you only need a 3% deposit to get started, and you can build up your security deposit while you live in your home before you buy it later.

Ultimately, rentvesting and rent-to-own have quite different end purposes. So you'll need to see which better fits your long-term goals. 

Use this calculator to find out how much you'd save with OwnHome compared to renting and saving.

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